Guidelines For The Final Projectgoalsthe Project Is Meant To Complemen ✓ Solved

Guidelines for the Final Project Goals The project is meant to complement and reinforce the key concepts from the course lectures, reading assignments, and examinations. The research paper will demonstrate an understanding of supply and demand equilibrium, various price elasticities, and elementary time-series analysis. To accomplish these tasks each group should understand and complete the following steps. 1. Choose a good or service.

Examples might include, beef, pork, automobile model, et cetera. a. Collect minimum 30 data points with a regular frequency. Annual data are often the easiest to collect and analyze. b. These data are the quantity of the good sold. For example, beef consumption or number of Camry’s sold. c.

This is the left hand (independent variable) for your estimated extended demand equation. 2. Gather the right hand (independent variables) data. a. Collect the (average) price for the good or service; i.e. the price of beef per pound or the sticker price of a Camry. b. Collect the average income for consumers of the product. c.

Collect the price of at least one (more is better) of a related good(s). d. Collect any other ‘data’ that your group thinks will ‘explain’ the demand for the good or service. Once the data are collected make sure that the variables are complete, and all span the same time frame; i.e. try to avoid missing values. With an appropriate dataset begin by estimating the extended demand equation. To do this please see the course notes and examples on Blackboard.

Also, please feel free to discuss with Professor Nguyen or Mr. Clancy. 3. Evaluate the estimated demand model. a. What is the R2?

Is it above 90%? 80%? i. Explain what the R2 means; i.e. how much of the variation in the quantity demanded does the model explain? b. What is the p-level associated with the model’s F-statistic? Is it less than 5%?

10%? What does the significance indicate about the model? c. Inspect the p-levels for all the independent variables. Are they less than 5%? 10%?

Interpret the p-levels and explain which variables are statistically significant. d. Omit any insignificant variables and re-run the model. i. Make sure your model has at least the independent variables including, the good’s own price, the price of a related good, and income. e. Re-evaluate steps a) – e) with the (new) model and any subsequent results. 4.

Check the signs for the independent variables to determine: a. Does the Law of Demand hold for the model? b. What is the sign for income? What does the sign signify? c. What is the sign for the related good’s price?

Positive, negative, or zero? Explain what this means about the relationship between the goods. 5. Compute three elasticities using the arc price formula for elasticity. a. The (own good) price elasticity of demand.

Interpret. b. The income elasticity of demand. Interpret. c. The cross-price elasticity of demand. Interpret.

6. Write the report and follow the style and guidelines provided in the sample paper found on Blackboard. 7. Turn in one printed (hard) copy, per group, to Professor Nguyen by the deadline. Tip Experience has shown that collecting the data early is the best way to ensure success.

If your group is having difficulty collecting a dataset, then please see Professor Nguyen or Mr. Clancy as soon as possible. We are here to help. Elasticities of Demand Demand elasticity is used to measure the sensitivity of consumer demand for a product or service based on changes to variables such as price and income. Applying our data for Demand of Pork, Price of Pork, Price of Beef and Income we can calculate these elasticities of demand.

In the sections below we will calculate and interpret the price elasticity of demand, income elasticity of demand and the cross-price elasticity of demand. Our extended demand equation is QD=63.63-13.01Pp+1.95Pb+.24M, where Pp is the price of pork, Pb is the price of beef and M is income. Using the data from 2015 we can create a reduced demand equation to estimate the quantity of pork. Year Pork Consumption Price Pork Price Beef Income .. QD = 63.63 -13.01Pp + 1.95 (4.38) + .24 (67) Reduced demand equation = QD = 88.25 – 13.01Pp When the Price of pork = 3.11, then QD = 47.79 We can now use the elasticity of demand calculation to determine the effect on demand if we increase the price of pork by .

If we input a increase of price, 4.11, into the reduced demand equation we calculate an estimated quantity demanded of 34.78. Now we can solve for the price elasticity to observe the effects of this increase. Price Elasticity of Demand = (ï„ in QD Pork/ï„ in P Pork)*(P Pork Avg/ QD Pork Avg) E = ((34.78-47.79)/(4.11-3.11))*((4.11+3.11)/2)/(34.78+47.79)/2)) = -1.14 How do we interpret -1.14? With an elasticity greater than 1 the demand for this product is elastic. Elastic goods and services tend to have more substitutes available.

As the price increases the demand can drop dramatically because consumers can purchase alternative products to replace it. From our calculations for Pork we find that if the price of pork increases 10% you will see an 11.4% decrease in quantity of pork demanded, on the other hand if there is a 10% decrease in the price of pork there will be a 11.4% increase in its demand. Based on our assumptions you can see below that raising the price of pork by will decrease revenues. Total Pork revenue with Price of Pork at