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The Case:: Shahid Gulzar

The document contains the solution to two questions regarding managerial economics. 1) The first question analyzes the demand curve faced by XYZ Company, a coupon book publisher. It is determined that increasing advertising expenditures from Rs. 15,000 to Rs. 20,000 would result in an upward shift in the demand curve from 85,500 units to 94,000 units demanded. 2) The second question evaluates a regression analysis with sales revenue as the dependent variable and R&D expenditures as the independent variable. It finds that R&D expenditures have a statistically significant impact on sales. A Rs. 1 increase in R&D is estimated to increase sales by Rs. 4.062 on average.

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Shahid Jugnoo
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70 views

The Case:: Shahid Gulzar

The document contains the solution to two questions regarding managerial economics. 1) The first question analyzes the demand curve faced by XYZ Company, a coupon book publisher. It is determined that increasing advertising expenditures from Rs. 15,000 to Rs. 20,000 would result in an upward shift in the demand curve from 85,500 units to 94,000 units demanded. 2) The second question evaluates a regression analysis with sales revenue as the dependent variable and R&D expenditures as the independent variable. It finds that R&D expenditures have a statistically significant impact on sales. A Rs. 1 increase in R&D is estimated to increase sales by Rs. 4.062 on average.

Uploaded by

Shahid Jugnoo
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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MB140400114

Shahid Gulzar
Assignment No. 1
Managerial Economics

Question No. 1.
The Case:
XYZ Company is a coupon book publisher with markets in several southeastern states.
XYZ coupon books are sold directly to the public, sold through religious and other
charitable organizations, or given away as promotional items. This year, management has
decided to increase the sales by attracting customers via increased level of advertisement.
In order to assess the effectiveness of this marketing strategy, concerned management has
suggested following demand function along with operating experience during the past
years:
Qd= 6500-5500P+0.05Pop+0.9I+1.7A
Where,
Q = Quantity
P = Price (Rs.)
Pop = Population
I = Disposable income per household (Rs.)
A = Advertising expenditures (Rs.)
a) Determine the demand curve faced by XYZ in a typical market in which P = 15,
Pop=200, 00, 00, I=Rs.40, 000; and A= 15,000.
b) Suppose XYZ Company increases its annual advertising expenditures from Rs.15,
000 to Rs.20, 000; what would be the demand curve in this case?
c) Evaluate the changes in demand curve before and after increasing advertising
expenditures?
SOLUTION
Question No. 1

Part a)
Qd = 6500 – 5500(P)+ 0.05(Pop)+0.9(I) +1.7(A)
The demand curve faced by XYZ in a typical market in which P = 15, P op=200, 00, 00,
I=Rs.40, 000; and A= 15,000 is:
Qd = 6500 – 5500(P)+ 0.05(Pop)+0.9(I) +1.7(A)
Putting the values of relevant variables in their place:
Qd = 6500 – 5500(15)+ 0.05(2,00,00,00)+0.9(40,000) +1.7(15,000)
Taking the negative values as a bundle and processed the data in MS Excel, we get:
Qd = 6500 – 82,500+ [1,00,000+36,000 +25,500]
Qd= 85,500

Part b)
Qd = 6500 – 5500(P)+ 0.05(Pop)+0.9(I) +1.7(A)
The demand curve of XYZ company in case of increase in advertising expenditures from
15,000 to 20,000 will be:
Putting the values of relevant variables in their place:
Qd = 6500 – 5500(15)+ 0.05(2,00,00,00)+0.9(40,000) +1.7(20,000)
Taking the negative values as a bundle and processed the data in MS Excel, we get:
Qd = 6500 – 82,500+ [1,00,000+36,000 +34,000]
Qd= 94,000
Part C)
The changes in demand curve due to increase in advertising expenditure from 15,000 to 20,000 is
shifting of the demand curve upward shift following a 8500 units increase and when advertising
expenditures were 15,000, the demand curve equation without (P) is:
Qd = 6500 – 5500(P)+ 0.05(Pop)+0.9(I) +1.7(A)
Putting the values of relevant variables in their place:
Qd = 6500 – 5500(P)+ 0.05(2,00,00,00)+0.9(40,000) +1.7(15,000)
Taking the negative values as a bundle and processed the data in MS Excel, we get:
Qd = 6500 – 5500 (P)+ [1,00,000+36,000 +25,500]
Qd = 1,68,000 – 5500P
After this, price as a function of quantity will be as under:
Qd = 1,68,000 – 5500P
5500P = 1,68,000 – Qd
Dividing the data by 5500;
P= [168000/5500] – [Qd/5500]

P= 30.55 - .000182Qd

When advertising expenditures were 20,000, the demand curve equation without (P) is:
Qd = 6500 – 5500(P)+ 0.05(2,00,00,00)+0.9(40,000) +1.7(20,000)
Taking the negative values as a bundle and processed the data in MS Excel, we get:
Qd = 6500 – 5500 (P)+ [1,00,000+36,000 +34,000]
Qd = 1,68,000 – 5500P
After this, price as a function of quantity will be as under:
Qd = 1,76,500 – 5500P
5500P = 1,76,500 – Qd
Dividing the data by 5500;
P= [176500/5500] – [Qd/5500]
P= 32.090 - .000182Qd
SOLUTION
Question No.2

Sales= 21.056 + 4.062 R&D


(0.13) (9.87)
R2 = 92%, F = 19.87; Critical value of F = 16.55, d.f = 2.5

First of all, the constant in such a regression typically has no meaning. Clearly, the intercept
should not be used to suggest the value of sales revenue that might occur for a firm that had zero
R&D expenditures. As discussed in the problem, this sample of firm is restricted to large
companies with significant R & D spending.

The R & D coefficient is statistically significant at the a=0.01 level with a calculated t statistic value
of 9.87, meaning that it is impossible to be less than 99% confident that R & D expenditures
affect firm sales. The probability of observing such a large t statistic when there is in fact no
relation between sales revenue and R & D expenditures is less than 1%.

The R & D coefficient estimate of 4.062 implies that a $1 rise in R & D expenditures leads to an
average 4.062 increase in sales revenue.

The R2 = 92% indicates the share of sales variation that can be explained by the variation in R &
D expenditures.

Note that F = 19.87 > 1,13, a=0.01 = 9.07, implying that variation in R & D expenditure explains a
significant share of the total variation in firm sales. This suggests that R & D expenditures are a
key determinant of sales in the computer software industry, as one might expect.

The standard error of the Y estimate, or SEE = 16.55 is the average amount of error encountered
in estimating the level of sales for any given level of R & D spending. If the U i error terms are
normally distributed about the regression equation, as would be true when large samples of more
than 30 or so observations are analyzed, there is a 95% probability that observations of the
dependent variable will lie within the range.

When very small samples of data are analyzed, as is the case here, “critical” values slightly
larger than two or three are multiplied by the SEE to obtain the 95% and 99% confidence
intervals.

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