Economic Assignment

OUM BUSINESS SCHOOL

MAY 2014

BMME5103

MANAGERIAL ECONOMICS

MATRICULATION NO : CGS00948301
IDENTITY CARD NO. : 810425-10-6009
TELEPHONE NO. : 016-2051042
E-MAIL : [e-mail]
LEARNING CENTRE : Kuala Lumpur

PART 1

Market segment
Sales (‘000 units)
Advertising expenditure
(RM’000)
Selling Price
(RM per unit)
Disposable Income
(RM’000)
1
160
150
15.00
19.0
2
220
160
13.50
17.5
3
140
50
16.50
14.0
4
190
190
14.50
21.0
5
130
90
17.00
15.5
6
160
60
16.00
14.5
7
200
140
13.00
21.5
8
150
110
18.00
18.0
9
210
200
12.00
18.5
10
190
100
15.50
20.0

a) Develop a regression model that determines the relationship between Sales and Selling Price.
I. What is the estimated regression equation? y = α + β(x)
Sales = 390.38 -14.26 (Selling Price)

II. Is selling price of a significant determinant of sales? At what level(s) of significance?
Yes, selling price indeed a significant determinant of sales. This is supported by the reading of P value which is 0.001, whereby 1 – 0.001 = 0.999. This can be translated that the finding is 99.9% confidence and therefore, it can be concluded that there is a positive relationship between selling price and sales.

III. What is the price elasticity of demand at a selling price of RM12.00 per unit?
Suppose that a demand “curve” has equation Sales = 390.38 -14.26 (Selling Price). We put “curve” in quotes as this equation is actually a straight line. Suppose that the current price is P0 = RM 12. The sales corresponding to this is Sales (So) = 390.38 -14.26 (12) = 219.26

ED = β2

P0

=

-14.26

X

12.00

= - 0.78

S0

219.26

Since the elasticity value is - 0.78, which less than 1, so the demand or sales is inelastic.

We also can interpret the above as, whenever the price increases by 1%, there is a decrease in sales by 0.78%.

b) Add disposable income as an independent variable and regress sales on both selling price and disposable income.
I. What is the