chapter5 - Norton Media Library Chapter 5 Estimating Demand...

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Chapter 5 Estimating Demand Functions Norton Media Library W. Bruce Allen Neil A. Doherty Keith Weigelt Edwin Mansfield
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Here we observe price-quantity observations tracing out what seems to be a demand curve But these prices and quantities may have been generated by movements in supply curves as well as demand curves The Identification Problem
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5.2 shows that this “demand curve” is really a set of demand=supply equilibrium points
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Only in 5.3 is the demand curve identified by the shifting of the supply curves alone. Thus we are statistically holding factors that shift demand constant in 5.3.
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Methods Used to estimate Demand Functions Consumer Interviews Market Experiments Linear Regression Analysis—fitting a straight line through a scatter of points to measure relationships among variables
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Regression Analysis Suppose that we have isolated a demand curve for a firm. We would like to know quantitative aspects of this demand curve. For example: by how much do sales Y increase as a result of more advertising X? We’ll use the following linear demand curve to illustrate: Here the other variables are price P, price of related commodities and disposable Income I EI DP CP BX A R + + + + = ' Y ) 1 (
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Bear in mind that a popular alternative to the linear curve is the constant elasticity demand curve, which is linear in logarithms: Proceeding with (1), regression analysis allows you to obtain estimates of the coefficients. I E P D P C X B A Y R ln ln ln ln ln ) 2 ( + + + + =
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Simple Regression Regression passes a line through the data in such a way as to minimize the distance of the predicted line from the scatter of data points. To focus on advertising X, suppose that all
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chapter5 - Norton Media Library Chapter 5 Estimating Demand...

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