Week 3 Flashcards
Define Empirical Demand functions
Demand equations derived from actual market data, useful in making product and pricing decisions.
In the formula Q = F (P,M,Pr,N) what do the letters stand for?
Q = Quantity Demanded
P = Price of the good or service
M = Consumer Income
Pr = Price of a related good
N = Number of Buyers
What is the formula for elasticity?
E = Percentage change in quantity demanded / percentage change in price
%🔺Q / %🔺P
- E is always negative
What is b = 🔺P/🔺Q?
Price elasticity of demand formula.
What is c = %🔺M/%🔺Q
Income elasticity of demand.
What is d = 🔺Pr/🔺Q?
Change in cross-price elasticity.
Is b expected to be negative or positive?
Negative.
Is C positive or negative?
Positive for normal goods, negative for inferior goods.
Is d positive or negative?
D is positive for substitutes, negative for complements.
What are the three potential problems with consumer interviews?
Representative sample
Response bias
Inability of the respondent to answer accurately.
What is the equation for time-series forecasting?
Qt = a + bt
What is the demand function equation?
Q=a+bP+cM+dPr
If b is > 0, sales are increasing or decreasing?
Increasing.
In the formula e = %🔺Q / %🔺P. What does %🔺Q / %🔺P equal?
b^
In a non-linear demand function equation, b^ equals what?
b^ equals the price elasticity of demand formula : E = %🔺P / %🔺Q
True or False:
In log-linear form, the coefficients are the elasticities.
True.
True or False:
A Negative sign in front of M means the good is inferior?
True. - = false, + = normal.
True or False:
A positive sign in front of Pr means the good is a substitute?
True. +=Substitute, - = complimentary.
True or False:
In log linear form, to solve a demand equation, you use the “ex” button on “a” because there is no coefficient on the parameter.
True. You use the “ex” button and then multiply all parameters and coefficients together.
Is b^ negative in Emperical demand functions?
Yes.
What is n-K?
Number of parameters minus one.
What is Qt = a + bt?
A linear trend equation.
True or False:
Dummy variables do not count in the degrees of freedom calculation.
False, they count.
How do you calculate the intercept including dummy variables?
You add the dummy variable amount to the original intercept.
