Tampa Bay Travel Agents Association wishes to determine the mathematical relation between the dollar volume of sales

of travel packages and the level of expenditures on newspaper advertising for travel agents located in the Tampa-St.Petersburg metropolitan area. Suppose out of a total 475 agencies in the area, 7 agencies have been selected as the sample for analysis. The sales and advertising expenditures for the sample are as follows: Agency A B C D E F G Sales ($) 15 000 30 000 30 000 25 000 55 000 45 000 60 000 Advertising Expenditure ($) 2 000 2 000 5 000 3 000 9 000 8 000 7 000

Given the information above, do the following: 1. Estimate the demand/sales function using the linear regression analysis. 2. Find the elasticity estimate. 3. Based on your regression estimates, would you be able to convince the association to accept the model that you estimated? Why or why not? 4. Write a report on how the association may benefit from your demand/sales estimation in decision-making.

DEMAND FUNCTION 1

A demand function model shows the relationship between the factors that influence the demand of a product and the quantity demand. In order to estimate a demand function for a product, it is necessary to use a specific functional form. Example of a simplified linear demand function and determinant of demand is as below:-

Q s = 1 S + 3 I ------ eqn 2 +
4a Q s = Quantity demand for shoes S = Price = Advertising Expenditure I = Household income 1 = Measures the change in quantity demanded when the price of the product change by 1 unit 2 = Measures the change in quantity demanded when advertising expenditure change by 1 unit = Measures the change in quantity demanded when income change by 1 unit 3 Manager of a firm need to estimate the values of the coefficient of the demand function & analyses its demand function of its product to reduce uncertainty in decision making and to achieve the objective of the firm. When the values of the coefficients have been estimated, they can used to make decision on optimality. For example, it will help to explain how much will the revenue of a firm change after increasing the price of its product by a certain amount or by how much the sales increase, if the expenditure of advertising increase, let say by 15%. The estimated demand function can also be used for forecasting. Forecasting involves predicting future economic conditions affecting firms operation that is, for planning production, introducing new products or investment decision.

QUESTION 1 2

Regression Analysis Describes the way in which 1 variable is related to another. It derives an equation that can be used to estimate the unknown values of 1 variable on the basis of the known values of another variable. There are 2 types of regression analysis. In this assignment , we are using E-View software package to determine the values of the constant & coefficient. Based on the data given in the question, the results are shown below. analysis which is simple regression analysis & multiple regression analysis. For this assignment, it is a simple regression

Demand/sales function estimation using the linear regression analysis:Dependent Variable: SALES Method: Least Squares Date: 03/27/13 Time: 15:49 Sample: 1 7 Included observations: 7 Variable ADVERTISING_EXPENDITURE C R-squared Adjusted R-squared S.E. of regression Sum squared resid Log likelihood F-statistic Prob(F-statistic) Coefficient 4.971910 11573.03 0.765242 0.718290 8782.644 3.86E+08 -72.31865 16.29851 0.009951 Std. Error 1.231542 7150.827 t-Statistic 4.037142 1.618419 Prob. 0.0100 0.1665 37142.86 16547.19 21.23390 21.21844 21.04289 2.323484

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

Table 1.1

Simple Regression Analysis In a simple regression analysis, the dependent variable (Y) is a function of only 1 independent variable (X). The fuction is written as:3

Y =a+bX
Y = Dependent variable a = Constant b = Slope / coeeficient X = Independent variable Based on the data given in the question and the results of the Demand/sales function estimation using the linear regression analysis, the regression line or the equation for it will be:Sales = 11573.03 + 4.9719 A

QUESTION 2 Elasticity is a measure of responsiveness of the quantity demanded when there is a change in its determinants. A standard formula to calculate elasticity is by using following formula :-

p =

Qx x x Px QX

Based on the question, we want to calculate the elasticity estimate between sales and advertising expenses. So the elasticity estimate will be as followed :-

Sales =

Sales Adv

Sales = 11573.03 + 4.9719 A Sales = 4.9719 Adv The elasticity estimate is 4.9719. When the sales changes by 1% the advertising expenditure will change by 4.9719%. QUESTION 3 Yes, the association should accept our estimated model. To reject or accept the regression, we shall look at the value of t-statictics & coefficient of determination. The t-test is used to determine if there is a significant relationship between the dependent & each independent variable. 4

T-statistics To carry out this test , we need the standard error of coefficient ( S b ) to calculate the t statistics. We divide the estimated coefficient (b) by the standard error coefficient ( S b ). t statistics = Sb
b

Next, we get the critical value that is, t n k 1, 0.05 value from the student t distribution table. n k = number of observation = represents the number of independent variables estimated

0.05 = the significant level

Rule of thumb can also be applied for t

n k 1, 0.05

, where its critical value will be 2

Finally, to determine if there is a significant relationship between the dependent & each independent variable, the calculated t statistics is compare with the value from the student t distribution table. If the value is greater than the value from the student t distribution, than the independent variable is said to be statistically significant, otherwise it is not statistically significant in explaining the dependent variable.

From the computer printout (Table 1.1) the standard error of coefficient of advertising expenses is 1.231542. The t statistic is calculate by : Calculated t = =
b Sb

4.971910 1.231542

= 4.037142 The critical value from the student t distribution table (as attached in Appendix I) with t
n k 1, 0.05

=t

7 1 1, 0.05

=t 5 at 95% confidence interval the critical t value is 2.571. Since

the value of t statistics is 4.037142 & greater than the critical t value 2.571, we can say that at 95% confidence interval, advertising expenditure is statistically significant in explaining sales. 5

The Coefficient of Determination (R2)

The value of coefficient of determination ranges from 0 to 1. If the value is 1 it shows

that all the changes in the dependent variable is explained by the variation in independent variable used in the regression. Therefore a value closer to 1 is preferred

From the computer printout (Table 1.1.), we can get the value of R 2 for the data given as 0.765242. It shows that 77% of changes in the dependent variable sales can be explained by the independent variables, advertising expenditure. The other 23% cannot be explained by the regression analysis. This may due to the omission of some other important independent variables. As a rule of thumb, the higher the value of R 2, the higher the explanatory power of the estimated equation & the more accurate for forecasting puposes.

The F-Statistic Although the R2 is a widely used statistic, it is subjective in the sense of how much the explained variation explained by the regression equation and whether it is enough to view the equation as being statistically significant. Another alternative is by using the F-statistic. In very general terms, this statistic provides a measure of the ratio of explained variation (in the dependent variable) to unexplained variation. To test whether the overall equation is 6

significant, this statistic is compared with a critical F-value obtained from an F-table (attached in this assignment on Appendix II). The critical F-value is identified by two separate degrees of freedom and the significance level. The first of the degrees of freedom is k - 1 (i.e., the number of independent variables) and the second is n - k. If the value for the calculated Fstatistic exceeds the critical F-value, the regression equation is statistically significant at the specified significance level. The F-statistic is used to test whether the regression equation as a whole explains a significant amount of the variation in Sales. The test involves comparing the F-statistic to the critical F-value with k - 1 and n - k degrees of freedom and the chosen level of significance. If the F-statistic exceeds the critical F-value, the regression equation is statistically significant. So, we will refer to the value of F-statistics in the Table 1.1. F-statistics = 16.29851

The critical value from F-distribution table with

at 95%

confidence level, the critical F-value is 5.3177. Since the value of F-statistics is 16.29851 and greater than the critical F-value 5.3177, I can say that advertising expenditure (independent variable) is statistically significant in explaining sales (dependent variable) at 95% confidence interval. The result of F-statistics supported the result of coefficient of determination ( .

So based on the result of of t-statictics, coefficient of determination & F-statistic, I think the association should accept our estimated model.

QUESTION 4 The association may benefit from our demand / sales estimation in making decision on optimality & can also be used for forecasting. In this case, Tampa Bay Travel Agents Association wishes to determine the mathematical relation between the dolar volume of sales of travel packages & the level of expenditures on newspaper advertising for travel agents 7

located in the Tampa-St. Petersburg metropolitan area. The value of t statistics shows that advertising expenditure is statistically significance in explaining the dependent variable which is sales. The t statistics shows a positive relationship where advertising expenditure may help to increase sales in the future.

Advertising is a form of communication that attempts to interpret the qualities of products, services and ideas in terms of consumer needs and wants. Some companies or organizations embrace advertising to achieve goodwill, high market share and sales. Advertising is a tool of marketing for communicating ideas and information about goods and services to an identified group, which employs paid space or time in the media. Advertising is any paid massage presented through various media, such as television, radio, magazines, newspaper, or billboards by an identified source.

Experience has shown that for any organization to succeed or grow and at the same time keep abreast with the rapid changes in todays business and technological environment, the laws of success must be observed and obeyed as a guiding principle. Otherwise, failure will subsist. Advertising policy is one of the inevitable laws of success in an organization. It is a truism that success or otherwise of any company lies in its ability to evolve the right strategies at the right time. Right strategies at wrong time can spell doom for an organization. Even the right strategies and right timing are not sufficient, the implementation, evaluation and monitoring of the strategies are important to the success of the company. Advertising is one of these strategies. From the analysis and the findings, it is crystal clear that there is improvement in the sales of the company as a result of advertising.

CONCLUSION As a conclusion, at first, the true relation between sales and advertising is unknown to the analyst. It must be discovered by analyzing data on sales and advertising. Researchers are never able to know with certainty the exact nature of the underlying mathematical relation 8

between the dependent variable and the explanatory variable, but regression analysis does provide a method for estimating the true relation. All the statistics that we need in order to analyze a regression are the coefficient estimates, R2 and the F-statistics that can be automatically calculated and printed by most available regression programs such as E-View. Based on these 3 statistics, we can conclude that :a) at 95% confidence interval, advertising expenditure is statistically significant in explaining sales. b) 77% of changes in the dependent variable sales can be explained by the independent variables, advertising expenditure. The other 23% cannot be explained by the regression analysis. This may due to the omission of some other important independent variables. c) since the value of F-statistics is 16.29851 and greater than the critical F-value 5.3177, I can say that advertising expenditure (independent variable) is statistically significant in explaining sales (dependent variable) at 95% confidence interval.