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Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved.Slide 1 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 2 The Identification Problem

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

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

Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved.Slide 5 Regression Analysis Regression Line: Line of Best Fit Regression Line: Minimizes the sum of the squared vertical deviations (e t ) 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 6 Regression Analysis

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) Model:

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) 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 9 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 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 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 12 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 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 Example Calculation

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 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 16 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 17 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 18 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 19 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 20 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 21 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 22 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 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: