Should you use the ordinary least-squares ols method or the


CONSULTING PROJECT

Estimation and Analysis of Demand for Fast Food Meals

You work for PriceWatermanCoopers as a market analyst. PWC has been hired by the owner of two Burger King restaurants located in a suburban Atlanta market area to study the demand for its basic hamburger meal package-referred to as "Combination 1" on its menus. The two restaurants face competition in the Atlanta suburb from five other hamburger restaurants (three MacDonald's and two Wendy's restaurants) and three other restaurants serving "drive-through" fast food (a Taco Bell, a Kentucky Fried Chicken, and a small family-owned Chinese restaurant).

The owner of the two Burger King restaurants provides PWC with the data shown in Table 1. Q is the total number of Combination 1 meals sold at both locations during each week in 1998. P is the average price charged for a Combination 1 meal at the two locations. [Prices are identical at the two Burger King locations.] Every week the Burger King owner advertises special price offers at its two restaurants exclusively in daily newspaper advertisements. A is the dollar amount spent on newspaper ads for each week in 1998. The owner could not provide PWC with data on prices charged by other competing restaurants during 1998. For the one-year time period of the study, household income and population in the suburb did not change enough to warrant inclusion in the demand analysis.

TABLE 1: Weekly Sales Data for Combination 1 Meals (1998)

week

Q

P

A

week



A

1

51,345

2.78

4,280

27

78,953

2.27

21,225

2

50,337

2.35

3,875

28

52,875

3.78

7,580

3

86,732

3.22

12,360

29

81,263

3.95

4,175

4

118,117

1.85

19,250

30

67,260

3.52

4,365

5

48,024

2.65

6,450

31

83,323

3.45

12,250

6

97,375

2.95

8,750

32

68,322

3.92

11,850

7

75,751

2.86

9,600

33

71,925

4.05

14,360

8

78,797

3.35

9,600

34

29,372

4.01

9,540

9

59,856

3.45

9,600

35

21,710

3.68

7,250

10

23,696

3.25

6,250

36

37,833

3.62

4,280

11

61,385

3.21

4,780

37

41,154

3.57

13,800

12

63,750

3.02

6,770

38

50,925

3.65

15,300

13

60,996

3.16

6,325

39

57,657

3.89

5,250

14

84,276

2.95

9,655

40

52,036

3.86

7,650

15

54,222

2.65

10,450

41

58,677

3.95

6,650

16

58,131

3.24

9,750

42

73,902

3.91

9,850

17

55,398

3.55

11,500

43

55,327

3.88

8,350

18

69,943

3.75

8,975

44

16,262

4.12

10,250

19

79,785

3.85

8,975

45

38,348

3.94

16,450

20

38,892

3.76

6,755

46

29,810

4.15

13,200

21

43,240

3.65

5,500

47

69,613

4.12

14,600

22

52,078

3.58

4,365

48

45,822

4.16

13,250

23

11,321

3.78

9,525

49

43,207

4.00

18,450

24

73,113

3.75

18,600

50

81,998

3.93

16,500

25

79,988

3.22

14,450

51

46,756

3.89

6,500

26

98,311

3.42

15,500

52

34,592

3.83

5,650

a. Using the data in Table 1, specify a linear functional form for the demand for Combination 1 meals, and run a regression to estimate the demand for Combo 1 meals.

b. Should you use the ordinary least-squares (OLS) method or the two-stage least-squares method (2SLS) method for estimating industry demand for rutabagas? Explain briefly.

c. Using statistical software, estimate the parameters of the empirical demand function specified in part a. Write your estimated industry demand equation for rutabagas.

d. Evaluate your regression results by examining signs of parameters, p-values (or 1-ratios), and the R2.

e. Discuss how the estimation of demand might be improved.

f. Using your estimated demand equation, calculate an own-price elasticity and an advertising elasticity. Compute the elasticity values at the sample mean values of the data in Table 1. Discuss, in quantitative terms, the meaning of each elasticity.

g. If the owner plans to charge a price of $4.15 for a Combination 1 meal and spend $18,000 per week on advertising, how many Combination 1 meals do you predict will be sold each week?

h. If the owner spends $18,000 per week on advertising, write the equation for the inverse demand function. Then, calculate the demand price for 50,000 Combination 1 meals.

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