The REDY Company produces a specialty cement used in the construction of roads. REDY is a price-setting firm and estimates the demand for its cement using a demand function in the linear form: Q = f( P, M, PR) where Qc = demand for cement/month (in yards) Pc = the price of cement per yard, M = country’s tax revenues per capita, and PR = the price of asphalt per yard. The manager of REDY obtained the following results in her attempt to estimate the demand for cement in the succeeding months. The results are presented below: DEPENDENT VARIABLE Qc R- SQUARE F-RATIO P-VALUE ON F OBSERVATIONS 64 0.8093 84.872 0.0001 VARIABLE PARAMETER ESTIMATE STANDARD ERROR T-RATIO P-VALUE INTERCEPT 8.20 4.01 2.04 0.0461 PC -3.54 1.64 -2.16 0.0357 M 0.64287 0.19 3.38 0.0014 PA 0.7854 0.38 2.07 0.0439 Explain the intercept and the coefficients of Pc, M, and PA. What type of good is cement? Why? What can you say about the relationship between cement and asphalt? Why?

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter11: Profit Maximization

Section: Chapter Questions

Problem 11.13P

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The REDY Company produces a specialty cement used in the construction of roads. REDY is a price-setting firm and estimates the demand for its cement using a demand function in the linear form:

Q = f( P, M, P_R)

where Qc = demand for cement/month (in yards) Pc = the price of cement per yard, M = country’s tax revenues per capita, and P_R = the price of asphalt per yard. The manager of REDY obtained the following results in her attempt to estimate the demand for cement in the succeeding months. The results are presented below:

DEPENDENT VARIABLE	Qc	R- SQUARE	F-RATIO	P-VALUE ON F
OBSERVATIONS	64	0.8093	84.872	0.0001
VARIABLE		PARAMETER ESTIMATE	STANDARD ERROR	T-RATIO	P-VALUE
INTERCEPT		8.20	4.01	2.04	0.0461
P_C		-3.54	1.64	-2.16	0.0357
M		0.64287	0.19	3.38	0.0014
P_A		0.7854	0.38	2.07	0.0439

Explain the intercept and the coefficients of Pc, M, and P_A_.
What type of good is cement? Why?
What can you say about the relationship between cement and asphalt? Why?
At the 5% level of significance, which variables are statistically significant?
If the price of cement per yard increases by 10, what will happen to the estimated quantity of cement demanded? What happens if it will increase by 20%?

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