Consider the following regression (standard errors in parentheses): Q = 8,400 -

Question

Consider the following regression (standard errors in parentheses): Q = 8,400 - 10 P + 5 A + 4 Px + 0.05 I (1,732) (2.29) (1.36) (1.75) (0.15) R2 = 0.65, N = 120 where Q=Quantity demanded; P=Price; A=Advertising expenditures, in thousands; Px=Price of competitor's good; I=Average monthly income Which of the following is correct regarding the quality of this equation? (Check all that apply.)

The R2 value is less than 1, so the equation is not helpful in explaining demand in this market.

The standard error of the Price variable is too large, so price is not important in determining demand in this market.

The standard error if the Income variable is too large, so we should consider removing Income from the equation.

The R2 value is less than 1, indicating that demand is not very responsive to price changes.

Explanation / Answer

Option D.

SInce the value of R2 is less than 1, this indicates that the demand is not very responsive to the price changes in the market.R Squared value is low and thus the equation does not explain fully the demand in the market.

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