Question

An MBA student has proposed the following demand equation for good Y.

Q_d^Y = a + b P_Y + c M

where: Q_d^Y = quantity demanded of good Y in millions of tons per year

P_Y = Price of good Y in dollars per ton

M = Average consumer income in thousands of dollars

A) What sign should this student expect a, b, and c to have? Explain.

The regression output from the computer is as follows:

Dependent Variable: Q_d^Y R-Square F-ratio p-value on F

Observations: 90 .4 12.84 0.015

Variable Parameter Estimate Standard Error T-ratio P-Value

Intercept 200.00 5468.32 3.12 0.0082

P_Y -2.00 1.65 -1.66 0.1145

M 0.01 3.29 1.12 0.2831

This economist is confortable using parameter estimates that are statistically significant at the 10 percent level or better.

B) Does P_Y have a statistically significant effect on the quantity demanded of good Y? Explain, using the appropriate p-value.

C) Does M have a statistically significant effect on the quantity demanded of good Y? Explain, using the appropriate p-value.

D) What fraction of the total variation in the quantity demanded of good Y remains unexplained? What can the student do to increase the explanatory power of his demand equation? What other variables might he add to his demand equation?

E)What is the expected quantity demanded of good y when P_Y = 100 and M = 10,000?