Assume your research staff used regression analysis to estimate the industry dem

Question

Assume your research staff used regression analysis to estimate the industry demand curve for Product X.
Qx = 10,000 - 100 Px + 0.5 Y - 1000 r
(3,000) (20) (0.3) (105)

Where Qx is the quantity demanded of Product X, Px is the price of X, Y is income, and r is the prime interest rate (given in decimals, e.g., 0.02 or 0.05) The standard error of each estimated coefficient is given in parentheses below it.

Also, the following information is provided about the regression equation.
Number of observations = 98
R2 = 0.95
F-statistic = 7.5

If prices remain constant next year but income is expected to increase by 50 and interest rates rise by two percentage points (by 0.02), what is the expected change in the quantity demanded?

Explanation / Answer

Qx = 10,000 - 100 Px + 0.5 Y - 1000 r any numbers that are constant will be the same in both years, so we can ignore them when we look at the equation r will increase by .02 and y will increase by 50 so the change will be .5(5)-1000(.02) = -17.5

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