Maurice Tutor
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QUESTION 1. Fun with Regressions (70 POINTS)
You have been retained by a regional food marketer, FoodKing, to forecast the demand for small cakes that are mass-produced and marketed under the name Big Suzy’s Snack Cakes. To assist with your analysis, you are provided with data that was collected for 8 consecutive quarters and 6 geographic markets. (Note: AN EXCEL FILE WITH DATA IS ATTACHED).EITHER CIRCLE or BOLD all Final Answers.
You are asked to address the following questions
(a) Estimate a regression model that expresses sales as a function of price, income and competitor’s price and population? Once you have estimates the regression model,
(i) provide a clear interpretation of the “R2” and
(ii) the statistical significant of the overall regression. Be sure to explain if the overall regression is statistically significant at a 5% level and how you know that.
(b) Can you provide a clear, concise interpretation for the slope coefficient on price? Be careful to keep the "units of measurement" straight.
(c) Is the slope coefficient of price significantly different (at a 5% probability of type I error) from zero? How do you know that?
(d) Can you provide a clear, concise interpretation for the slope coefficient on income?
(e) FoodKing is considering entering a new market. In this market, the population is 2,450,000, the average (or per capita) income is $42,900 and the competitor’s product sells for $4.70. Using this regression model, if you price your product at $5.25, how many pies will you sell? SHOW YOUR WORK.
Answer: I will sell __________ pies
(f) If you increase the price you charge from $5.25 to $5.30, how much will your TOTAL REVENUE rise or fall?? (hint: go back and look at your economic notes to remember refresh your memory on Total Revenue)
Answer: Total Revenue (TR) will rise/fall (circle one)by _______ $
(g) One of your assistants notes that market that you are considering entering is located in the southern part of the nation and asserts that “everyone knows that southerners eat lots of snack cakes.” You note that in your data set, Atlanta and Dallas are the only two cities that are in the “South” census district. Can you test you assistant’s hypothesis that “southerners eat lots of snack cakes”? Is she correct? If so, how many more snack cakes, on average, do southerners eat? SHOW YOUR WORK.
Answers:
(i) Do Southerners eat more snack cakes? Yes or No (circle one)
(ii) If "Yes", then, on average, they eat ______ more snack cakes? (fill in number)
QUESTION II: Decision Analysis (30 Points)
Your firm is considering entering a new geographic market. It is unclear how successful your product would be in that market.
To enter this market, you must invest $4,000,000 on initial advertising. After investing in the advertising, the amount of product you actually sell will depend on the level of demand for your product. If the “high” level of demand is realized, then the “operating profit” (revenues less operating cost) will be $5,600,000. If the “medium” or “low” demand levels are realized, your “profit” will be $4,000,000 and $2,000,000 respectively. These profit estimates do not account for the initial advertising expenditure. The probably of each of these three demand levels being realized is low (30%), medium (40%) and high (30%).
Revenue must rise by = $______________________
I would be willing to pay up to = $_______________________
Attachments: Year-Quarter Unit Sales (Q) Price (cents) Com Price (cents) Income ($000) Population (000)
Atlanta, GA 1998-1 22,600 600 425 39.5 2,150
Atlanta, GA 1998-2 25,100 525 375 39.5 2,150
Atlanta, GA 1998-3 22,600 500 325 39.0 2,250
Atlanta, GA 1998-4 27,600 525 400 39.5 2,300
Atlanta, GA 1999-1 25,100 575 400 39.5 2,350
Atlanta, GA 1999-2 25,100 575 375 40.0 2,450
Atlanta, GA 1999-3 25,100 600 375 40.5 2,500
Atlanta, GA 1999-4 27,600 550 375 41.5 2,650
Baltimore, MD 1998-1 27,500 600 425 40.0 2,300
Baltimore, MD 1998-2 25,000 550 400 39.0 2,200
Baltimore, MD 1998-3 22,500 600 400 38.5 2,150
Baltimore, MD 1998-4 22,500 625 400 39.0 2,200
Baltimore, MD 1999-1 22,500 550 375 39.0 2,200
Baltimore, MD 1999-2 22,500 600 400 39.0 2,250
Baltimore, MD 1999-3 27,500 525 425 39.5 2,250
Baltimore, MD 1999-4 25,000 600 400 39.5 2,300
Chicago, IL 1998-1 32,500 600 400 46.0 6,200
Chicago, IL 1998-2 27,500 575 375 44.0 6,050
Chicago, IL 1998-3 25,000 600 450 44.5 6,100
Chicago, IL 1998-4 30,000 575 350 44.5 6,250
Chicago, IL 1999-1 30,000 550 375 45.0 6,200
Chicago, IL 1999-2 22,500 600 350 44.5 6,150
Chicago, IL 1999-3 27,500 600 375 45.0 6,100
Chicago, IL 1999-4 32,500 550 375 45.5 6,150
Dallas, TX 1998-1 27,600 625 400 46.0 1,500
Dallas, TX 1998-2 25,100 575 400 43.5 1,025
Dallas, TX 1998-3 27,600 600 400 43.5 1,050
Dallas, TX 1998-4 30,100 575 425 44.0 1,100
Dallas, TX 1999-1 30,100 550 425 44.5 1,350
Dallas, TX 1999-2 25,100 625 375 44.5 1,450
Dallas, TX 1999-3 27,600 625 450 45.0 1,300
Dallas, TX 1999-4 27,600 625 350 46.0 1,450
Denver, CO 1998-1 35,000 500 400 47.5 1,600
Denver, CO 1998-2 30,000 550 425 46.5 1,450
Denver, CO 1998-3 27,500 575 350 47.0 1,450
Denver, CO 1998-4 25,000 600 325 46.5 1,500
Denver, CO 1999-1 27,500 550 350 46.0 1,550
Denver, CO 1999-2 30,000 600 400 46.5 1,550
Denver, CO 1999-3 32,500 550 425 47.0 1,600
Denver, CO 1999-4 32,500 575 400 47.0 1,650
Erie, PA 1998-1 17,500 600 375 35.5 300
Erie, PA 1998-2 17,500 575 400 34.0 280
Erie, PA 1998-3 15,000 575 350 34.0 275
Erie, PA 1998-4 17,500 575 375 34.0 270
Erie, PA 1999-1 15,000 625 325 34.0 265
Erie, PA 1999-2 17,500 575 350 34.5 270
Erie, PA 1999-3 15,000 600 375 34.5 285
Erie, PA 1999-4 17,500 625 375 35.0 290