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CEE_594_31 - CEE 594/ECNS.494 Problem Set 3(Due Wednesday...

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CEE 594/ECNS.494 Problem Set # 3 (Due Wednesday November 9 in Lecture) 1. A manufacturer of computer workstations gathered average monthly sales figures from its 56 branch offices and dealerships across the country and estimated the following demand for its product using a least squares regression technique. Q = + 15,000 – 2.80 P + 150 A + 0.3 Ppc + 0.35 Pm + 0.2 P c (5,234) (1.29) (175) (0.12) (0.17) (0.13) R 2 = 0.68 SEE = 786 Standard errors for the estimated coefficients are in parentheses below them. The variables and their assumed values are: Q = Quantity P = Price of basic model = 7,000 A = Advertising expenditures (in thousands) = 52 P pc = Average price of a personal computer = 4,000 P m = Average price of a minicomputer = 15,000 P c = Average price of a leading competitor’s workstation = 8,000 a. Compute the elasticities for each variable. On this basis, discuss the relative impact that each variable has on the demand. What implications do these results have for the firm’s marketing and pricing policies? b. Suppose a manager evaluating these results suggests that interest rates and the performance of the computer (typically measured in millions of instructions per second of MIPS) are important determinants of the demand for workstations and must therefore be included in the study. How would you respond to this suggestion? Elaborate. c. These sales data were compiled in 1996, and it is time to do a revised model to forecast server sales for 2007 to 2010. Outline if, why and how your model might change and how you might go about testing which model is likely to provide the best forecast. 2. Office Enterprises (OE) produces a line of metal office file cabinets. The company’s economist, having investigated a large number of past data, has established the following equation of demand for these cabinets using a least squares regression technique: Q = 10,000 + 60 B – 100 P + 50 C where Q = Annual number of cabinets sold B = Index of nonresidential construction
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