1. Principles and Worldwide Applications, 7th Edition
Managerial Economics
Principles and Worldwide Applications, 7th Edition
Dominick Salvatore &
Ravikesh Srivastava

2. Chapter 4:
Demand Estimation

4. Marketing Research Approaches to Demand Estimation
Consumer Surveys
data from survey questions
Observational Research
data from observed behavior
Consumer Clinics
data from laboratory experiments
Market Experiments
data from real market tests

7. Regression Analysis
Scatter Diagram

9. 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

11. Ordinary Least Squares (OLS)
Model:

12. Ordinary Least Squares (OLS)
Objective: Determine the slope and intercept that minimize the sum of the squared errors.

13. Ordinary Least Squares (OLS)
Estimation Procedure

14. Ordinary Least Squares (OLS)
Estimation Example

15. Ordinary Least Squares (OLS)
Estimation Example

16. Standard Error of the Slope Estimate
Tests of Significance
Standard Error of the Slope Estimate

17. Tests of Significance
Example Calculation

18. Tests of Significance
Example Calculation

19. Tests of Significance Calculation of the t Statistic
Degrees of Freedom = (n-k) = (10-2) = 8
Critical Value at 5% level =2.306

20. Tests of Significance Decomposition of Sum of Squares
Total Variation = Explained Variation + Unexplained Variation

22. Coefficient of Determination
Tests of Significance
Coefficient of Determination

24. Coefficient of Correlation
Tests of Significance
Coefficient of Correlation

25. Multiple Regression Analysis
Model:

28. Multiple Regression Analysis
Adjusted Coefficient of Determination

29. Multiple Regression Analysis
Analysis of Variance and F Statistic

30. 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.

32. Durbin-Watson Statistic
Test for Autocorrelation
If d = 2, autocorrelation is absent.

33. Steps in Demand Estimation
Model Specification: Identify Variables
Collect Data
Specify Functional Form
Estimate Function
Test the Results

34. Functional Form Specifications
Linear Function:
Power Function:
Estimation Format:

38. Chapter 4 Appendix

42. Getting Started
Install the Analysis ToolPak add-in from the Excel installation media if it has not already been installed
Attach the Analysis ToolPak add-in
From the menu, select Tools and then Add-Ins...
When the Add-Ins dialog appears, select Analysis ToolPak and then click OK.

44. Entering Data
Data on each variable must be entered in a separate column
Label the top of each column with a symbol or brief description to identify the variable
Multiple regression analysis requires that all data on independent variables be in adjacent columns

45. Example Data

46. Running the Regression
Select the Regression tool from the Analysis ToolPak dialog
From the menu, select Tools and then Data Analysis...
On the Data Analysis dialog, scroll down the list of Analysis Tools, select Regression, and then click OK
The Regression tool dialog will then be displayed

49. Select the Data Ranges
Type in the data range for the Y variable or select the range on the worksheet
Type in the data range for the X variable(s) or select the range on the worksheet
If your ranges include the data labels (recommended) then check the labels option

51. Select an Output Option
Output to a selected range
Selection is the upper left corner of the output range
Output to a new worksheet
Optionally enter a name for the worksheet
Output to a new workbook
And then click OK

53. Regression Output

54. Multiple Regression Data

56. Regression Output