Demand Estimation

Managerial Economics
Dr. Carlos Ordás Criado
ETH Zürich
cordas@ethz.ch
Demand Estimation in Economics

November 11, 2010
C. Ordás Criado (CEPE-ETH) Managerial Economics (Fall 2010) Demand Estimation 1 / 40

Econometric modelling
Economists use two main type of statistical models to forecast and provide
policy analysis.
1 Single-equation models study a variable of interest with a single
(linear or non-linear) function of a number of explanatory variables.
2 In multiple or simultaneous equation models, the variable of interest
is a function of several explanatory variables which are related to each
other with a set of equations.
Specific estimation techniques may be needed depending on the data type:
1 A times series is a time-ordered (daily, weekly, . . . ) sequence of data
(price, income, . . . ) which often requires special statistical treatment.
2 a cross section refers to data collected by observing many subjects
(individuals, firms or countries) at the same point in time. Its analysis
usually consists of comparing the differences among the subjects.
Here we provide some background on demand estimation and regression
analysis in the context of a single-equation approach.

Simple Linear Demand Estimation
”Nobody employs expensive, time-consuming and complicated demand

estimation techniques when inexpensive and simple methods work just
fine.”, Hirschey (2009, p.162).
Example 1: Grasshopper (GZ), one of Zurich’s soccer teams playing in the
Swiss Soccer Super League, offered CHF 5 off the CHF 20 regular price of
reserved seats. Sales increased from 6’000 to 7’000 seats per game. What is
the demand for GZ’s game tickets? Assuming a linear relationship:
(
6000 = a + b(20)
Q = a + bP ⇒
7000 = a + b(15)
Solving for a and b gives the deterministic demand relationship:
Q = 10000 + -200P or, equivanlently, P = 50 + −0.005Q (1)

| {z } | {z }
demand inverse demand

Price Elasticity of Demand
From Example 1, we notice that the slope of the demand function being
negative, GZ’s games are a normal good!
We can also compute the price elasticity resulting directly from the price
change (arc elasticty):
Q1 −Q0 7000−6000
Q0 6000 2
P1 −P0
= 15−20 =−
P0 20
3
Note that in the context of a linear function, the arc elasticty is equal to the
point elasticity:
∂Q P0 20 2
= −200 =−
∂P Q0 6000 3
Economists usually plot the inverse demand, i.e., the price variable is on the
y -axis. The inverse demand function is useful in several contexts.

Inverse Linear Demand Function
Economists usually plot demand functions with the price variable is on the
y -axis and the quantities in the x-axis:
Revenue-maximizing output level
If the cost of producing an additional soccer game for GZ is fixed, we can

use the inverse ticket demand function (1) to find the revenue-maximizing
price level :
T = P × Q = (50 − 0.005Q ) = 50Q − 0.005Q 2
| {z }
inverse demand
Let’s maximize T with respect to Q:

FOC: (∂T /∂Q) = 0 ⇒ 50 − 0.01Q = 0 ⇒ Q ∗ = 5000
SOC: (∂ 2 T /∂Q 2 ) < 0 ⇒ −0.01 < 0 ⇒ Q ∗ is max!
Price at Q ∗ : P ∗ = 50 − 0.005(5000) = 25
Verify on slide 3 that at P = 20, T = 120000. Reducing the price to P = 15

(-25%) increased the ticket sales in a lower proportion (+16.6%) to 6000.
Therefore, T dropped to 105000. Setting the price to 25 could have
generated 125000 in ticket revenues.
Would ↑ P have been judicious for GZ? Well, less costumers (-1000) means
less high margin products (sodas, beers, burgers,. . . ) sold!
Aggregating Several Demand Functions
Market demand shows the willingness to pay of all customers. Market

demand is constructed by aggregating individual demands. An example:
Demand Aggregation
Domestic Foreign Total
Price
Demand (QD ) Demand (QF ) Demand (Q)
100 0 0 0
80 20000 0 20000
60 40000 5000 45000
40 60000 10000 70000
... ... ... ...
The above figures come from the following linear demand functions:
Domestic: P = 100 − 0.001QD Foreign: P = 80 − 0.004QF
Inverting the above functions and aggregating the quantities, we get the
market demand (domestic + foreign),
QD + QF = Q = 120000 − 1250P ⇔ P = 96 − 0.008Q (2)

Aggregate or Total Demand
Identification Problem
Estimating demand relations can be complicated because of the interplay

between demand and supply.
The dashed AB line is not a demand. Advanced statistical techniques are

required to identify demand in that case.

Statistical Relation
A deterministic relation is an association between variables that is known
with certainty.
Economic relationships are not deterministic in nature because they cannot
be predicted with absolute accuracy.
Real world economic data are rather of statistical type :

Linear Models
A statistical model in the context of demand estimation for good x coud be

of the form :
Qx = a 0 + a 1 P x + a 2 m + a 3 P y + ǫ (3)
Qx = b0 Pxb1 mb2 Pyb3 e ε (4)
where ǫ and ε are random terms that follow some statistical distribution.
Equation (3) is clearly linear. Some nonlinear functions, such as (4), are
linear in the parameters. To see why, note that:
log Qx = log b0 +b1 log Px +b2 log m +b3 log Py +ε ⇔
| {z } | {z } | {z } | {z } | {z }
Q̃x β0 P̃x m̃ P̃y
Q̃x = β0 + b1 P̃x + b2 m̃ + b3 P̃y + ε (5)
The parameters of model (4) could be estimated with the linear model (5).
The most popular technique to estimate the coefficients of functional forms
which are linear in the parameters is linear regression.
Linear Regression
Linear regression consists in finding the best-fitting line that minimizes the
sum of squared deviations between the regression line and the set of
original data points. This technique is also know as the Ordinary Least
Squares (OLS) method.

Ordinary Least Squares (OLS)
Consider the following multiple regression model:
yi = β0 + β1 xi1 + . . . + βp xip + ǫ (6)
with n observations (i = 1, 2, . . . , n), p explanatory variables and K = p + 1

coefficents (the βp s plus the intercept β0 , where k = 0, 1, 2, . . . , K ).
The OLS method finds the β parameters (called β̂) such that :
n
X n
X
min (ǫi )2 = (yi − β0 − β1 xi1 − . . . − β1 xip )2 (7)
β0 ,β1 ,...,βp
i=1 i=1
Problem (7) has a closed form and unique solution when the explanatory
variables are linearly independent, i.e., no exact linear relationships exist
between two or more explanatory variables.
Most statistical softwares possess pre-implemented routines/functions to
perform regression analysis (Excel, Matlab, R, SPSS, S-Plus, Stata, . . . )

Fundamental OLS Assumptions
Four fundamental assumptions are necessary to get unbiased estimates of

the parameters and to carry statistical inference with a regression model:
1 the model is correctly specified, i.e., the relationship is linear in the

regression parameters β.
2 each term ǫi comes from a normal distribution with mean 0 and
constant variance σ 2 and it is independent of each other;
3 the explanatory variables x1 , x2 , . . . , xp are nonrandom, measured
without errors and independent of each other and of the intercept;
4 the error ǫi is uncorrelated with the observations xip for all p.
These assumptions can be formally verified (out-of-scope of this lecture). If

they are plausible, you can interpret the regression results.

Correlation Coefficient
The goodness of fit of the regression estimates must be evaluated before

interpreting the regression coefficients.
The most straightforward measure is simply the correlation coefficient
between the y data and their fitted counterpart, called ŷ :
P
(yi − ȳ )(yi − ŷ¯ )
R = cor (y , ŷ ) = p P P (8)
2
(yi − ȳ )2 (ŷi − ŷ¯i )2
where ȳ is the mean of the yi s and ŷ¯ is the mean of the fitted values (ŷi s).
Note that R ∈ [0, 1]. The closer R is to 1, the better the fit.

Explained and Unexplained Variation of Regression Fits
Other important goodness of fit measures (the R 2 and the F -statistic) rely
on a decomposition of the variation of the dependent variable y into ‘total’,
‘explained’ and ‘unexplained’ variation:
X
n
SST = (yi − ȳ )2 sum of squared deviations in y ≡ total variation (9)
i=1
Xn
SSR = (ŷi − ȳ )2 sum of squares of regression ≡ explained variation (10)
i=1
Xn
SSE = (yi − ŷi )2 sum of squared errors ≡ unexplained variation (11)
i=1
where ŷi is the regression estimate of yi and ȳ is the mean of the yi s.

It is not difficult to show that SST = SSR + SSE .

Explained and Unexplained Variation of Regression Fits
Goodness-of-Fit of the Regression Line: R 2
The R 2 captures the proportion of total variation of the dependent variable

y ‘explained’ by the full set of independent variables and it is defined as
SSR SSE
R2 = =1− . (12)
SST SST
The R 2 in (12) is equal to the square of R in (8) only when regression (6)
includes an intercept. The closer the R 2 is to 1, the larger the share of
variation explained by the model.
Note that adding explanatory variables to the regression never penalizes the
R 2.
The R 2 can be compared across models as long as the y variable shares the
same units of measurement.

Goodness-of-Fit of the Regression Line: Adjusted R 2
A downward-adjusted version of the R 2 , called adjusted R 2 , exists to

account for the degrees of freedom, i.e. the number of observations
beyond the minimum needed to calculate the regression statistic. The
adjusted R 2 is
2 SSE /(n − K ) n−1

Radj =1− =1− (1 − R 2 ). (13)
SST /(n − 1) n−K
2
Note that Radj is not the share of total variance explained by the regression
model (it can be negative even in the presence of an intercept).
2
Preference should be given to the Radj when comparing regression models
with different number of predictors.
2
The closer Radj to 1, the better the model.

Global Significance of the Regressors - the F -test
The F -statistic tells if the explanatory variables as a group explain a

statistically significant share of the variation in the dependent variable :
SSR/K − 1 MSR R 2 /(K − 1)

F = = = (14)
SSE /(n − K ) MSE (1 − R 2 /(n − K ))
MSR = (SSR/K − 1) is also called Mean Squares of Regression and

MSE = (SSE /n − K ) is the Mean Squared Errors. The term df 1 = K − 1
corresponds to the numerator’s degrees of freedom while df 2 = n − K is the
denominator’s degrees of freedom.
Note that F ≥ 0. If R 2 = 0, then F = 0 and y is statistically unrelated to x
variables.
Data series always display some (weak) statistical relationships.
How large should F be to ensure that at least some of the explanatory
variables explain a statistically significant portion of the variation in y ?

Building the F -distribution
F is a random variable whose statistical distribution can be determined

under some assumptions.
Recall from equation (14) that F depends on the fitted values of the
regression model (through the SS terms) and on two different numbers of
degrees of freedom.
Under the assumptions that :
1 the regression errors are normally distributed (see slide 14),
2 β1 = β2 = . . . = βp = 0 in regression (6),
we can get statistical distributions of F , called F -distributions, which
depend on the two numbers of degrees of freedom.
Assumption (2) above is the null hypothesis under which the F -distribution
is derived. It assumes that none of the explanatory variables x has a
significant relationship with y .
The F -distributions are in general highly skewed to the right and they
become more symmetric as the sample size increases.

F-distributions
The F -distribution depends on the degrees of freedom.
1.2
F(df1=1,df2=10,alpha=5%)
1.0
0.8
Density
0.6
0.4
0.2
0.0
0 2 4 6 8 10
F-statistics above the colored thresholds suggest significant contribution of

the explanatory variables at the 5% significance level.
Thresholds for the F -test
The size of the F -statistic from equation (14) is then compared to the
F -values derived under the null hypothesis. If the F -statistic lies far in the
right tail of the F -distribution, the null hypothesis is unlikely to be true for
the investigated dataset.
Statisticians usually consider that a F -statistic which has only 5% chances
(or lower) to be observed under the null hypothesis is sufficient evidence to
reject the null hypothesis. This rejection level is called significance level
and it is noted α.
Statistical tables of F -distributions exist for different α levels. They
provide critical F -values, noted F(df
∗
1,df 2,α) , for a large range of degrees of
freedom. They report P(F > F(df 1,df 2) ) = α. To reject the null hypothesis
∗
at the significance level of α = 5%, the following criteria must hold:

F > F(df
∗
1,df 2,0.05) ⇔ P(F ) < 0.05 (15)
The term P(F ) in (15), called the p-value of the F computed with (14),
corresponds to the probability that a F -statistic at least as extreme as F is
observed under the null hypothesis. Both criteria in (15) are identical.
Precision of the Regression Coefficients
Rejecting the null hypothesis of the F -test ensures that the regression’s
predictors as a whole contribute to explain a statistically significant portion
of the variation in the dependent variable y . We can then proceed to
analyze the relationship between each explanatory variable and y .
Before interpreting their sign and magnitude, the precision and
reliability of each individual coefficient can be assessed with the help of:
1 its standard error or standard deviation, denoted seβ̂k ;

2 its t-statistic t = β̂k /seβ̂k .
The detailed calculation of seβ̂k is not shown here (it is part of any standard
regression output).
When the size of a coefficient (or some deviation from it) is large as
compared to its standard deviation, the relationship between xk and y is
expected to be strong.

Testing the Regression Coefficients: 2-tail or 1-tail t-tests
Two-tailed t-test: If we want to assess whether an individual coefficient βk

is significantly different from some arbitrary (possibly null) β ∗ , we can
∗
derive the theoretical distribution of t = β̂kse−β under the null hypothesis
β̂k
that β̂k = β ∗ . We then construct an interval around β ∗ (called confidence

interval) which contains with probability 1 − α the true value β ∗ . If the
t-statistic that we obtain from the regression with the observed data does
not fall within the confidence interval, we reject the null in favor of the
alternative β̂k 6= β ∗ .
One-tailed t-test: Other alternative hypotheses can be of interest, in
particular, β̂k > β ∗ or β̂k < β ∗ at a significance level of α. Such tests simply
∗
require the absolute value of t = β̂kse−β to be larger than some theoretical
β̂k
threshold.
The appropriate distribution for the one-tailed or two-tailed t-tests when the
OLS assumptions (slide 14) hold is the Student’s t-distribution. The
related critical value is denoted t(n−K
∗
,α) and depends on the degrees of
freedom n − K .
Student distribution
The t-statistic can be shown to be distributed as a Student’s t-distribution
centered on β ∗ (here below β ∗ = 0):
0.4
stud(df=1,alpha=5%)
stud(df=3,alpha=5%)
norm(0,1,alpha=5%)
0.3
Density
0.2
0.1
0.0
−10 −5 0 5 10
The colored dots are two-tails critical values

t for α = 5%. Note that the
t-distribution tends toward the Normal shape as n − K increases.
Significance Level of the Regression Coefficients
Again, we can rely indifferently on either critical values of the t-statistic,

noted t(n−K
∗
,α) , or on a p-value of the t-statistic.
For testing the null hypothesis that βk = β ∗ at the significance level α

against the alternative βk 6= β ∗ (2-tail t-test):
β̂k −β ∗
compute t = seβ̂ ;
k
if |t| > t(n−K
∗
,α/2) or if P(|t|) < α, reject the null hypothesis in favor of
the alternative of significant difference at the significance level of α.
For testing the null hypothesis that βk = β ∗ against the alternative βk > β ∗
or βk < β ∗ at the significance level α (1-tail t-test),
use the former t ratio
if |t| > t(n−K
∗
,α) or P(|t|) < α, reject the null hypothesis in favor of the
chosen unilateral alternative at the significance level α.
Tables of the t-distribution may report 1-tail p-values 1 − P(t ≤ tn−K
∗
,α ) = α
or 2-tail p-values 1 − P(|tn−K ,α/2 | ≤ t) = α. Be aware of what you use.
∗

Confidence Interval around the Regression Coefficients
Confidence intervals at the 1 − α level can also be constructed around βˆk .

If you use a table of the t-distribution (2-tail t-test):
β̂k ± t(n−K
∗
,α/2) seβ̂k (16)
If that interval does not include some arbitrary (and possibly null) value β ∗ ,
the regression coefficient is significantly different from β ∗ at the α
significance level.
Once you have carried out the appropriate individual t-tests on the β̂k s, you
can proceed to interpret the coefficients.

Interpreting Regression Coefficients
Regression coefficients are parameters of a functional relationship, so they

are straightforward to interpret!
For the linear demand function :
∂ Q̃ ∂ Q̃
Q̃ = β̂0 + β̂1 P̃ + β̂2 m̃ + . . . ⇒ β̂1 = ; β̂2 = ... (17)
∂ P̃ ∂ m̃
⇒ β̂1 is the change in Q̃ corresponding to a unit change in P̃ when all other
explanatory variables are kept constant.
If the variables are in logarithms, e.g. Q̃ = log Q, P̃ = log P, m̃ = log m in
equation (17), remember that the coefficients are elasticities:
1 ∂Q
∂ log Q Q ∂Q Q
β̂1 = = 1 = ∂P
;... (18)
∂ log P P ∂P P
Note that when you have more than one explanatory variable in a regression,
the regression coefficients are partial regression coefficients, i.e.,
β̂1 6= cor(Q̃, P̃) in equation (17).
A Regression Example with Excel 2007/2010
To replicate this example, use the file regression.xlsx from the course
website. These data are from Hirschey (2009, P.190).
We estimate the following single equation demand model:
UNIT SOLD = β0 + β1 PRICE + β2 ADVERT + β3 PERS SELL + ǫ (19)
For performing regression analysis with Excel 2007/2010, you need first to
enable Excel’s Data Analysis Toolbox:
1 go the the File tab or click the Office button and then click on Options
2 click on Add-Ins, select ‘Analysis Toolpak’ in the ‘Inactive Application
Add-ins’ and click on the ‘Go. . . ’ button
3 The ‘Add-Ins’ window will pop up. Select ‘Analysis Toolpak’ and click
OK
You can check that the Data Analysis Toolbox has been properly enabled by
selecting the Data tab in Excel and checking that the ‘Data Analysis’ option
is available under the ‘Analysis’ buttons.
Then open regression.xlsx in Excel and use the data in the ‘data’ sheet.
A Regression Example with Excel - Steps (1) and (2)
Select ‘Analysis Toolpak’ and click on the ‘Go. . . ’ button
A Regression Example with Excel - Step (3)
Select ‘Analysis Toolpak’ and press OK

A Regression Example with Excel - Regression Tool
Click on the ‘Data Analysis’ button and select Regression

A Regression Example with Excel - Regression Window
To replicate the results, use the same options in the Regression Window.
A Regression Example with Excel - Regression Output
A Regression Example with Excel - Regression Output
The Excel regression output generated above is divided in 4 main parts:

1 Regression statistics (R, R 2 , Radj
2
, sereg , obs.)
2 SST, SSR, SSE and F-test, called (Analysis of Variance or ANOVA)
3 Regression Coefficients
4 Residuals
The link between the Excel output and the formulas from the former slides is
emphasized below. The sheet ‘regression (2)’ in regression.xlsx provides
further formulas’ checks (in yellow) that can be of interest.

A Regression Example with Excel - ‘Regression Statistics’
Let’s focus on the ‘Regression statistics’:

The multiple correlation coefficient R = cor (y , ŷ ) = 0.98 is very high.
This is not too surprising when time-series are employed.
The R square indicates that the regression explains 97% of the total
variance. It can be computed either by squaring the above R (because
the regression includes a constant: 0.982 = 0.97) or with information
from the ANOVA table (try to apply equation (12)).
In regressions based on cross-sectional data, R 2 > 0.5 is already a good
fitting performance.
2
The Radj = 0.958 is pretty close to the R 2 which indicates that the
penalization linked to the degrees of freedom is not large.
The regression standard error (123.92) corresponds to the denominator
in equation (14). You can check this by typing in an Excel cell:
=sqrt(sumsq(resid range)/(12-4))
(replacing resid range with the appropriate range, check the sheet
‘regression (2)’).

A Regression Example with Excel - ANOVA Table
The ANOVA table :

The figures reported in column Sum of Squares (SS) correspond to
SSR, SSE and SST from equations (9) to (11).
The MSR (Mean Square Regression) and MSE (Mean Square Errors)
figures correspond to numerator and denominator from equation (14)
and F = MSR/MSE = 85.40.
To judge if F is large enough (is the contribution of all the predictors
to the explained variation is significant?), we can check whether or not
P(F ) < 0.05: ⇒ ‘Significance F’ being very small, we reject the null
hypothesis at the 5% significance level and conclude that the predictors
(price, advertising and personal sells) contribute to explain the
variation of quantity sold.
Note that you can get the P(F ) with the following Excel function:
=fdist(F,df1,df2)
(replace the F, df1, df2 with appropriate information from the
ANOVA table, check the sheet ‘regression (2)’)

A Regression Example with Excel - Coefficients’ Results
Regarding the regression coefficients:

The p-value of the t-stat is lower than 5% for most coefficients, which
means that they are significantly different from 0 at that significance
level. You can check that the ‘T-stat’ column is the ‘Coefficients’
column divided by the ‘Standard error’ column.
The Excel functions that provides the 1-tail or 2-tail p-values of the
Student’s t-distribution is ‘tdist()’ and the one for getting t(n−K
∗
,α) is
t.inv().
We can test if the price coefficient (-0.296) is significantly lower than
0 by simply comparing |t| = 2.908 with the unilateral cutoff
t12−4,0.05
∗
= 1.86 as indicated in slide 27. As |t| > t ∗ we reject the null
in favor of a significantly negative coefficient.
We also notice that for CHF 100 spent in Advertising we get an
average of 3.6 units sold/month.
Finally note that Excel provides 95% confidence intervals around the
coefficients. They correspond to those described in equation (16).

References
Hirschey M., Managerial Economics, 12th Edition, Ch.5.

Chatterjee S., Hadi A., Price B., Regression Analysis by Example, 3rd
Edition, Ch.3.
W. Greene, Econometric Analysis, 6th Edition, Ch.3.

Demand Estimation

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Managerial Economics

Dr. Carlos Ordás Criado

Demand Estimation in Economics

C. Ordás Criado (CEPE-ETH) Managerial Economics (Fall 2010) Demand Estimation 1 / 40

C. Ordás Criado (CEPE-ETH) Managerial Economics (Fall 2010) Demand Estimation 2 / 40

”Nobody employs expensive, time-consuming and complicated demand

Solving for a and b gives the deterministic demand relationship:

Q = 10000 + -200P or, equivanlently, P = 50 + −0.005Q (1)

C. Ordás Criado (CEPE-ETH) Managerial Economics (Fall 2010) Demand Estimation 3 / 40

C. Ordás Criado (CEPE-ETH) Managerial Economics (Fall 2010) Demand Estimation 4 / 40

If the cost of producing an additional soccer game for GZ is fixed, we can

Let’s maximize T with respect to Q:

Verify on slide 3 that at P = 20, T = 120000. Reducing the price to P = 15

Market demand shows the willingness to pay of all customers. Market

C. Ordás Criado (CEPE-ETH) Managerial Economics (Fall 2010) Demand Estimation 7 / 40

Estimating demand relations can be complicated because of the interplay

The dashed AB line is not a demand. Advanced statistical techniques are

C. Ordás Criado (CEPE-ETH) Managerial Economics (Fall 2010) Demand Estimation 9 / 40

C. Ordás Criado (CEPE-ETH) Managerial Economics (Fall 2010) Demand Estimation 10 / 40

A statistical model in the context of demand estimation for good x coud be

Q̃x = β0 + b1 P̃x + b2 m̃ + b3 P̃y + ε (5)

C. Ordás Criado (CEPE-ETH) Managerial Economics (Fall 2010) Demand Estimation 12 / 40

Consider the following multiple regression model:

yi = β0 + β1 xi1 + . . . + βp xip + ǫ (6)

with n observations (i = 1, 2, . . . , n), p explanatory variables and K = p + 1

C. Ordás Criado (CEPE-ETH) Managerial Economics (Fall 2010) Demand Estimation 13 / 40

Four fundamental assumptions are necessary to get unbiased estimates of

1 the model is correctly specified, i.e., the relationship is linear in the

These assumptions can be formally verified (out-of-scope of this lecture). If

C. Ordás Criado (CEPE-ETH) Managerial Economics (Fall 2010) Demand Estimation 14 / 40

The goodness of fit of the regression estimates must be evaluated before

C. Ordás Criado (CEPE-ETH) Managerial Economics (Fall 2010) Demand Estimation 15 / 40

where ŷi is the regression estimate of yi and ȳ is the mean of the yi s.

C. Ordás Criado (CEPE-ETH) Managerial Economics (Fall 2010) Demand Estimation 16 / 40

The R 2 captures the proportion of total variation of the dependent variable

C. Ordás Criado (CEPE-ETH) Managerial Economics (Fall 2010) Demand Estimation 18 / 40

A downward-adjusted version of the R 2 , called adjusted R 2 , exists to

2 SSE /(n − K ) n−1

C. Ordás Criado (CEPE-ETH) Managerial Economics (Fall 2010) Demand Estimation 19 / 40

The F -statistic tells if the explanatory variables as a group explain a

SSR/K − 1 MSR R 2 /(K − 1)

MSR = (SSR/K − 1) is also called Mean Squares of Regression and

C. Ordás Criado (CEPE-ETH) Managerial Economics (Fall 2010) Demand Estimation 20 / 40

F is a random variable whose statistical distribution can be determined

C. Ordás Criado (CEPE-ETH) Managerial Economics (Fall 2010) Demand Estimation 21 / 40

F-statistics above the colored thresholds suggest significant contribution of

at the significance level of α = 5%, the following criteria must hold:

1 its standard error or standard deviation, denoted seβ̂k ;

C. Ordás Criado (CEPE-ETH) Managerial Economics (Fall 2010) Demand Estimation 24 / 40

Two-tailed t-test: If we want to assess whether an individual coefficient βk

that β̂k = β ∗ . We then construct an interval around β ∗ (called confidence

The colored dots are two-tails critical values

Again, we can rely indifferently on either critical values of the t-statistic,

For testing the null hypothesis that βk = β ∗ at the significance level α

C. Ordás Criado (CEPE-ETH) Managerial Economics (Fall 2010) Demand Estimation 27 / 40

Confidence intervals at the 1 − α level can also be constructed around βˆk .

C. Ordás Criado (CEPE-ETH) Managerial Economics (Fall 2010) Demand Estimation 28 / 40

Regression coefficients are parameters of a functional relationship, so they

Select ‘Analysis Toolpak’ and press OK

Click on the ‘Data Analysis’ button and select Regression

The Excel regression output generated above is divided in 4 main parts:

C. Ordás Criado (CEPE-ETH) Managerial Economics (Fall 2010) Demand Estimation 36 / 40