Part 1: Select a product or service of your choice
- Clearly identify and describe your product or service. Note; your selection must be a product or service, not a particular brand of a product or service.
- Indicate, giving reasons, whether you believe demand for your selected product is price elastic or inelastic and whether you believe the product is a normal luxury, a normal necessity, or an inferior good. State the signs (plus or minus) that you expect the coefficients of price and income will have in the demand function obtained by the regression.
Part 2: Using multiple regression, estimate a demand function for your selected product or service. Use quantity demanded, Qd, as the dependent variable and price, P, and income, Y, as independent variables.
- The regression should be based on at least 10 observations of demand, price, and income. Observations may be obtained from a questionnaire or by other means. The source of the observed data must be carefully explained. If a questionnaire is used, a copy should be attached to the final submission.
- After inputting your data and running the regression program, present the demand function in the form;
Qd = a + b1P + b2Y,
where a is the constant term, b1 is the price coefficient and b2 is the income coefficient. The standard errors of the estimates should be shown underneath the relevant coefficients. The coefficient of determination, R2, should also be clearly shown.
- Comment on the signs of the coefficients of the independent variables and indicate whether your expectations given in part 1 have been confirmed.
- Calculate t-ratios for both of the independent variables and use them to assess the statistical significance of each variable’s impact on demand.
- Explain the significance of the R2 value. Suggest, giving reasons, particular additional variables that might result in a higher R2 value if they were included in the regression.
Part 3: Use your demand function to make predictions of the level of demand for a range of price and income values and to calculate price and income elasticities of demand.
- Use the demand function to predict demand for three different price and income combinations.
- Using the point elasticity method, calculate the price elasticity of demand and the income elasticity of demand for the product for each of the three price and income combinations.
- State whether the expectations discussed in part 1 have been confirmed.
Part 4: Discuss possible pricing strategies for firms supplying this particular product.
- With reference to real price data, discuss the pricing strategies that you think existing suppliers of the product/service may be using.
- Giving reasons, suggest an appropriate pricing strategy (or strategies) for sellers of this product.
- Note: The analysis in this section may be confined to a particular firm, or firms, operating in the market or in particular stages of the supply chain. Students are encouraged to refer to the market structures in existence and how they might impact on pricing strategies