Chapter 4 Demand Estimation

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Chapter 4 Demand Estimation Managerial Economics in a Global Economy, 5th Edition by Dominick Salvatore Chapter 4 Demand Estimation Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved. Slide 1

The Identification Problem Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved. Slide 2

Demand Estimation: Marketing Research Approaches Consumer Surveys Observational Research Consumer Clinics Market Experiments Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved. Slide 3

Regression Analysis Scatter Diagram Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved. Slide 4

Regression Analysis Regression Line: Line of Best Fit Regression Line: Minimizes the sum of the squared vertical deviations (et) of each point from the regression line. Ordinary Least Squares (OLS) Method Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved. Slide 5

Regression Analysis Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved. Slide 6

Ordinary Least Squares (OLS) Model: Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved. Slide 7

Ordinary Least Squares (OLS) Objective: Determine the slope and intercept that minimize the sum of the squared errors. Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved. Slide 8

Ordinary Least Squares (OLS) Estimation Procedure Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved. Slide 9

Ordinary Least Squares (OLS) Estimation Example Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved. Slide 10

Ordinary Least Squares (OLS) Estimation Example Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved. Slide 11

Standard Error of the Slope Estimate Tests of Significance Standard Error of the Slope Estimate Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved. Slide 12

Tests of Significance Example Calculation Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved. Slide 13

Tests of Significance Example Calculation Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved. Slide 14

Tests of Significance Calculation of the t Statistic Degrees of Freedom = (n-k) = (10-2) = 8 Critical Value at 5% level =2.306 Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved. Slide 15

Tests of Significance Decomposition of Sum of Squares Total Variation = Explained Variation + Unexplained Variation Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved. Slide 16

Decomposition of Sum of Squares Tests of Significance Decomposition of Sum of Squares Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved. Slide 17

Coefficient of Determination Tests of Significance Coefficient of Determination Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved. Slide 18

Coefficient of Correlation Tests of Significance Coefficient of Correlation Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved. Slide 19

Multiple Regression Analysis Model: Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved. Slide 20

Multiple Regression Analysis Adjusted Coefficient of Determination Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved. Slide 21

Multiple Regression Analysis Analysis of Variance and F Statistic Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved. Slide 22

Prepared by Robert F. Brooker, Ph. D Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved. Slide 23

Problems in Regression Analysis Multicollinearity: Two or more explanatory variables are highly correlated. Heteroskedasticity: Variance of error term is not independent of the Y variable. Autocorrelation: Consecutive error terms are correlated. Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved. Slide 24

Durbin-Watson Statistic Test for Autocorrelation If d=2, autocorrelation is absent. Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved. Slide 25

Steps in Demand Estimation Model Specification: Identify Variables Collect Data Specify Functional Form Estimate Function Test the Results Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved. Slide 26

Functional Form Specifications Linear Function: Power Function: Estimation Format: Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved. Slide 27