ECO 740

CASE EXERCISE SOFT DRINK DEMAND ESTIMATION

PREPARED BY GROUP

:NIK NORMIE EDAYU BT. HJ. NIK HIM

: BM 770 (evening track)

MATRIX NO. : 2011913361 SUBMITTED TO : DR. AZLINA BT. HANIFF

Demand can be estimated with experimental data, time-series data, or cross-section data. Sara Lee Corporation generates experimental data in test stores where the effect of an NFL-licensed Carolina Panthers logo on Champion sweatshirt sales can be carefully examined. Demand forecasts usually rely on time-series data. In contrast, cross-section data is appear in Table 1. Soft drink consumption in cans per capita per year is related to six-pack price, income per capita, and mean temperature across the 48 contiguous in the United States. Table 1 Cans/Capita 6-Pack $ Income /Yr Price $/Capita 200 2.19 150 1.99 237 1.93 135 2.59 121 2.29 118 2.49 217 1.99 242 2.29 295 1.89 85 2.39 114 2.35 184 2.19 104 2.21 143 2.17 230 2.05 269 1.97 111 2.19 217 2.11 114 2.29 108 2.25 108 2.31 248 1.98 203 1.94 77 2.31 97 2.28 166 2.19 177 2.27 143 2.31 157 2.17 111 2.43 330 1.89 63 2.33 165 2.21 184 2.19 68 2.25 Mean Temp. F 13 17 11 25 19 27 28 18 14 16 24 20 16 17 13 15 16 21 22 21 18 10 19 19 16 24 18 24 15 25 13 14 22 16 19 66 62 63 56 52 50 52 72 64 46 52 52 50 56 56 69 41 54 47 47 41 65 57 44 49 48 35 54 56 48 59 39 51 82 51

Alabama Arizona Arkansas California Colorado Connecticut Delaware Florida Georgia Idaho Illinois Indiana Iowa Kansas Kentucky Louisiana Maine Maryland Massachusetts Michigan Minnesota Mississippi Missouri Montan Nebraska Nevada New Hampshire New Jersey New Mexico New York North Carolina North Dakota Ohio Oklahoma Oregon

Pennsylvania Rohde Island South Carolina South Dakota Tennessee Texas Utah Vermont Virginia Washington West Virginia Wisconsin Wyoming Total Mean Question 1

121 138 237 95 236 222 100 64 270 77 144 97 102 7594 158.208333 3

2.31 2.23 1.93 2.34 2.19 2.08 2.37 2.36 2.04 2.19 2.11 2.38 2.31 105.72 2.2025

20 20 12 13 13 17 16 16 16 20 15 19 19 861 17.9375

50 50 65 45 60 69 50 44 58 49 55 46 46 2573 53.604166 67

Estimate the demand for soft drink using a multiple regression program available on your computer. Answer QD = 514.267 242.971 Price + 1.224 Income 2.931 Temp (4.120) r2 =0.698 (0.804) SSE=38.261 (-5.582)

SPSS result:
Coefficientsa Unstandardized Coefficients Std. Model 1 (Constant) Price Income Temp B Error Beta t 4.538 -.588 .076 .402 -5.582 .804 4.120 Sig. .000 .000 .426 .000 Lower Bound 285.862 -330.692 -1.844 1.497 Upper Bound 742.672 -155.249 4.293 4.365 Standardized Coefficients 95% Confidence Interval for B

514.267 113.332 -242.971 1.224 2.931 43.526 1.523 .711

a. Dependent Variable: Can

EViews7 result:
Dependent Variable: CAN Method: Least Squares Date: 04/07/12 Time: 22:00 Sample: 1 48 Included observations: 48 Variable C PRICE INCOME TEMP R-squared Adjusted R-squared S.E. of regression Sum squared resid Log likelihood F-statistic Prob(F-statistic) Coefficient 514.2669 -242.9708 1.224164 2.931228 0.698024 0.677435 38.26108 64412.06 -240.9536 33.90231 0.000000 Std. Error 113.3315 43.52628 1.522613 0.711458 t-Statistic 4.537722 -5.582162 0.803989 4.120027 Prob. 0.0000 0.0000 0.4257 0.0002 158.2083 67.36719 10.20640 10.36233 10.26533 1.980543

Mean dependent var S.D. dependent var Akaike info criterion Schwarz criterion Hannan-Quinn criter. Durbin-Watson stat

Question 2 Interpret the coefficients and calculate the price elasticity of soft drink demand. Mean P =105.72 / 48 = 2.2025 Mean Q = 7594 / 48 = 158.2083 dQ/dP = -242.97 Price elasticity ED = ( dQ/dP ) / (Mean P /Mean Q ) ED = (-242.97) / ( 2.2025 / 158.2083 ) ED = ( - 3.38 ) The price elasticity at the mean price and quantity across the states is in the elastic range, as expected. These are market-level price elasticity, so no firm behaviour is directly implied by this estimate. The elastic demand at the market level does imply elastic firm-level demand at comparable prices, comparable price sensitivity, and the smaller quantities facing each firm.

Question 3 Omit price from the regression equation and observe the bias introduced into the parameter estimate for income. QD = -56.614 -2.054Y + 4.695F

Coefficientsa Unstandardized Coefficients Model 1 (Constan t) Income B 56.614 -2.054 4.695 Std. Error 63.117 Standardized Coefficients Beta t Sig.

-.897 .375 1.132

1.815 .824

-.128

.264

Temp

.644 5.699 .000

a. Dependent Variable: Can

Question 4 Now omit both price and temperature from the regression equation. Should a marketing plan for soft drinks be designed that relocates most canned drink machines into low income neighbourhoods? Why or why not? ANSWER QD = 254.563 5.372Y
Coefficientsa Unstandardized Coefficients Model 1 (Constant) Income a. Dependent Variable: Can B 254.563 -5.372 Std. Error 41.091 2.232 -.334 Standardized Coefficients Beta t 6.195 -2.407 Sig. .000 .020

No, a marketing plan should not be designed specifically to introduce canned soft drink machines to low-income neighbourhoods.