Economics
posted by Greg .
Wilpen Company, a price setting firm, produces nearly 80 percent of all tennis balls purchased in the United States. Wilpen estimates the U. S. demand for its tennis balls by using the following linear specification: where Q is the number of cans of tennis balls sold quarterly, P is the wholesale price Wilpen charges for a can of tennis balls, M is the consumers’ average household income, and PR is the average price of tennis rackets. The regression results are as follows:
Dependent Variable: Q
Observations: 20
RSquare: 0.8435
FRatio: 28.75
PValue on F: 0.001
Variable
InterceptParameter Estimate 425120, Standard Error 220300, TRatio 1.93, PValue 0.0716
P Parameter Estimate 37260.6, Standard Error 12587, TRatio 22.96, PValue 0.0093
M Parameter Estimate 1.49, Standard Error 0.3651, TRatio 4.08, PValue 0.0009
PR Parameter Estimate 1456, Standard Error 460.75, TRatio 3.16, PValue 0.006
a. Discuss the statistical significance of the parameter estimates a ˆ , , , and using the p values. Are the signs of , and consistent with the theory of demand? Wilpen plans to charge a wholesale price of $ 1.65 per can. The average price of a tennis racket is $ 110, and consumers’ average household income is $ 24,600.
b. What is the estimated number of cans of tennis balls demanded?
c. At the values of P, M, and PR given, what are the estimated values of the price ( ), income ( M), and cross price elasticities ( XR) of demand?
d. What will happen, in percentage terms, to the number of cans of tennis balls demanded if the price of tennis balls decreases 15 percent?
e. What will happen, in percentage terms, to the number of cans of tennis balls demanded if average household income increases by 20 percent?
f. What will happen, in percentage terms, to the number of cans of tennis balls demanded if the average price of tennis rackets increases 25 percent?
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