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BUS 640 Week 2 Consumer .pdf


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BUS 640 Week 2 Consumer Demand Analysis and Estimation
Applied Problems

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BUS 640 Week 2 Consumer Demand Analysis and Estimation Applied
Problems

Consumer Demand Analysis and Estimation Applied Problems. Please,
complete the following 3 applied problems in a Word or Excel
document. Show all your calculations and explain your results. Submit
your assignment in the drop box by using the Assignment Submission
button.

1. Roshima is researching universities where she could study for her
MBA degree. She is considering 3 major attributes that she considers
important in her choice: ranking, price, and location. The value she
places on each attribute, however, differs according to whether she
remains full-time employed during her studies or quits her job and
focuses on her degree. If she continues to work full time and takes all
her courses online, then ranking is the most important attribute,
twice as important as price and three times as important as location.
If she quits her job and attends school full time, then location
becomes three times as important as ranking and twice as important
as price. She is considering two universities, respectively, the MBA
program at Arizona State University (ASU) and the MBA program at
University of Phoenix (UOP), both of which are priced at
approximately $25,000. She has rated each attribute on a scale of 1 to
100 for each of the two schools.

a. Which of the two options should Roshima pursue of she wants to
keep her full-time job? (Calculate the total expected utility from each
school option and compare. Graph is not required)

b. Which of the two options should she pick if she plans to quit her job
and dedicate to her studies?

c. Which option should she pursue if the probability of being laid off
and unable to find a new job is estimated as 0.6? Show your
calculations and explain your reasoning.

2. The demand function for Einstein Bagels has been estimated as
follows:

Qx = -15.87 – 40.73Px + 84.17Py + 0.55Ax

where Qx represents thousands of bagels; Px is the price for each
bagel; Py is the average price per bagel of other brands of bagels; and
Ax represents thousands of dollars spent advertising Einstein Bagels.
The present values of the independent variables are Ax=216, PX=0.85,
and Py=0.79.

a. Calculate the price elasticity of demand for Einstein’s Bagels and
explain what it means.

b. Derive an expression for the (inverse) demand curve for Einsteins’s
Bagels.

c. If the cost of producing Einstein’s Bagels is constant at $0.10 per
bagel, should they reduce price and thereafter, sell more bagels
(assume profit maximization is the company’s goal)?

d. Should Einstein Bagels spend more on advertising?

3. The consulting firm that you work for has been hired by the US
Government to provide an independent analysis of the demand-side
effects of a contemplated increase in the tax on gasoline. They
provide you with a data set relating to the period 1962-1987, which
they say contains valuable historic lessons relating to the impact of
volatile pump prices due to the supply restrictions imposed by the
Organization of Petroleum Exporting Countries (OPEC), and the
Corporate Average Fuel Economy (CAFE) regulations that required car
manufacturers to increase the fuel efficiency of the cars they sold,
while at the same time Real Disposable Income (RDI) per capita was
rising, the number of passenger cars (NPC) almost doubled, and
inflation was pushing up the Consumer Price Index (CPI).

a. Reconcile the fact that while the quantity demanded of gasoline
and pump prices both rise over this period generally, they are
inversely related along a demand curve.

b. Conduct a multiple regression analysis to explain the quantity
demanded of gasoline in terms of the other data provided. (Transpose
this data into an Excel spread-sheet and use the Excel regression tool,
if loaded, or alternatively download an ‘add-in’ regression program
such as ‘Statpro’ to find the regression statistics).

c What proportion of the variance in Qx is explained by these other
variables? What missing variables might account for the remainder of
the variance in the quantity demanded of gasoline?

d. Use the regression equation to predict the quantity demanded of
gasoline in 1988 for the values Px = 68.5; NPC = 145,885; MPG = 20.36;
RDI = 11,192; and CPI = 354.6.

e. What is the 95% confidence interval for your prediction?


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