The following information applies to questions (1) through (5) below:
Market researchers at the XYZ Corporation have studied various demand elasticities for one of their product lines by linear regression techniques. The regression estimate they feel is most appropriate is given below. (All statistics regarding that regression were significant and acceptable, and all data was in natural logarithm form, so that coefficients in the regression may be interpreted directly as elasticities.)
ln QD = 4.62 - 1.63 ln PXYZ +1.81 ln PO +3.04 ln I +1.20 ln A +.72 ln POP
Where:
QD = Quantity of XYZ Corp.'s product estimated to be bought next year.
4.62 = the constant or intercept term in the regression
PXYZ = Price of XYZ's product
PO = Price of some other product XYZ is testing against its own product
I = level of personal income in the test market
A = level of annual advertising dollars XYZ spends on its product
POP = number of people in the population that XYZ is targeting
(1) Is the price elasticity of demand for QD elastic or inelastic?
A) Elastic
B) Inelastic
C) Unit elastic
D) Cannot be determined from information given
(2) Is the good with price PO a substitute or a complement with XYZ's product?
A) Substitute
B) Complement
C) Neither
D) Cannot be determined from information given
(3) Is XYZ's product a necessity, an inferior, or a luxury good?
A) Necessity
B) Inferior
C) Luxury
D) Cannot be determined from information given
(4) If XYZ Corp. increases its advertising budget on this product by 10% next year, what will it expect the percent growth in its sales to be?
A) 5%
B) 10%
C) 12%
D) Cannot be determined from the information given
(5) If XYZ expects the population of its target market to growth by 20% next year, how will that affect its sales growth?
A) 5%
B) 10%
C) 14.4%
D) Cannot be determined from the information given.