Chapter 3: Quantitive demand analysis

Income elasticity

a measure of the responsiveness of the demand for a good to changes in consumer income; the percentage change in quantity demanded divided by the percentage change in income

If demand is perfectly elastic, then the demand curve is

horizontal

Log-linear demand

if the logarithm of demand is a linear function of the logarithms of prices, income, and other variables

Perfectly elastic demand

if the own price elasticity is infinite in absolute value.

Perfectly inelastic demand

if the own price elasticity is zero.

Does demand tend to be more inelastic in the short term or the long term?

in the short term

If demand is elastic, a ______ in price will lead to a ______ in total revenue.

increase, decrease or decrease, increase

If demand is inelastic, a ______ in price will lead to a _____ in total revenue.

increase, increase or decrease, decrease

When there are few close substitutes for a good, demand tends to be relatively _____. This is because consumers can't readily switch to a close substitute when the price increases.

inelastic

Marginal revenue (MR)

is the change in total revenue due to a change in output

Total revenue test

is the relationship among the changes in price, elasticity, and total revenue

How is the log-linear demand curve shaped?

it is a convex curve

P-values of .05 or lower are considered

low enough for researcher to be confident that the estimate coefficient is statistically significant

Cross-advertising elasticity between goods X and Y would

measure the percentage change in the consumption of X that results from a 1 percent change in advertising directed toward 1

P-values

moe precise measure of statistical significance

Demand for food (a broad commodity) is ________ than the demand for beef (a specific commodity).

more inelastic

If demand is elastic, a price increase leads to consumers to

substitute toward another product, then reducing the quantity demanded for the good.

Own adversing elasticity of demand for good X is

the ratio of the percentage change in the consumption of X to the percentage change in advertising spent on X

T-statistic

the ratio of the value of a parameter estimate to the standard error of the parameter estimate

Econometrics

the statistical analysis of economic phenomena

If demand is perfectly inelastic, then the demand curve is

vertical

When is R-squared considered a better fit?

when closer to 1

When t-stat for a parameter estimate is large in absolute value, then

you can be confident that thee true parameter is not zero

Elasticity

a measure of the responsiveness of one variable to changes in another variable; the percentage change in one variable that arises due to a given percentage change in another variable

Standard error

a measure of how much each estimated coefficient would vary in regressions based on the same underlying true demand relation, but with different observations

Cross-price elasticity

a measure of the responsiveness of the demand for a good to changes in the price of a related good; the percentage change in the quantity demanded for one good divided by the percentage change in the price of a related good

Own price elasticity

a measure of the responsiveness of the quantity demanded of a good to change in the price of that good; the percentage change in quantity demanded divided by the percentage change in the price of the good

By the law of demand, there is an inverse relation between price and quantity demanded; thus, the own price elasticity of demand is what kind of number?

a negative number

When the absolute value of the own price elasticity is less than 1,

an increase in price increase total revenue

When the absolute value of the own price elasticity is greater than 1,

an increase in price leads to a reductio in total revenue

Multiple regressions

are regression of dependent variable on multiple explanatory variables

When is total revenue is maximized?

at the point where demand is unitary elastic (E = -1) and MR = 0

What are 3 factors that affect the magnitude of the own price elasticity of a good?

available substitutes, time, and expenditure share

If there are more substitutes available for the good, the more _____ the demand for it is.

elastic

F-stat with significance values of 5 percent or less are

generally considered significant

An increase in the price of good Y leads to a decrease in demand for good X means

goods X and Y are complements

An increase in the price of good Y leads to an increase in demand for good X means

goods X and Y are substitutes

If demand is inelastic, a price increase causes consumers to

not able to readily switch to a close substitute .

Absolute value of the own price elasticity gets larger as

price increases

F-stat

provides a measure of the total variation explained by the regression relative to the total unexplained variation

How to maximize profits a firm should produce?

set marginal revenue to equal marginal cost (MR=MC)

R square (coefficient of determination)

tells the fraction of the total variation in the dependent variable that is explained by the regression

When demand is perfectly elastic, a manager who raises prices even slightly will find:

that none of the good is purchased due to competing versions of the product being sold at cheaper price

If the absolute value of a t-stat is greater than or equal to 2, then

the corresponding parameter estimate is statistically different from zero (manager is 95 percent confident)

If the absolute value of the own price elasticity is greater than 1, then

the demand is elastic

If the absolute value of the own price elasticity is less than 1, then

the demand is inelastic

If the absolute value of the own price elasticity is equal to 1, then

the demand is unitary elastic

P-value of .05 is said that

the estimated coefficient is statistically significant at the 5 percent level.

When is f-stat considered a better fit?

the greater it is

Least squares regression

the line that minimizes the sum of squared deviations between the line and the actual data points

The lower the significance value of the F-stat,

the more confident you can be of the overall fit of the regression equation.