The result of the demand forecast of coffee is presented to you for analysis. As a new manager of the company, you are required to provide an explanation for this forecast given your knowledge of managerial economics so that the company would know what to concentrate on. 

Y = 5.2 - 0.5P + 0.2T + 0.6X 

                (3.2)    (9.3)     (1.2) 

R² = 0.63; F-statistics = 3.8; t-statistics are values provided in the brackets above 

Y = the quantity demand for coffee 

P = the price of coffee (in riyal) 

T = the demand for tea (in number of quantity) 

X = the income of people in the market surveyed (in 1,000 riyal) 

 

Demand function

Y=5.2-0.5P+0.2T+0.6X

Y-Quantity demand for coffee

P-Price of coffee

T-demand for Tea

X-Income

R²=0.63

Step-by-step explanation

Interpretations

1) A unit increases in price of coffee(P) leads to a fall in demand for coffee by 0.5 units on average reaping other variables constant

The expected sign of P is in line with the theory since demand and price of a commodity are negatively relate

Tea and coffee are substitutes of each other .The coefficient of T indicates that a unit decreases the demand for coffee by 0.2 units on average reaping other variables constant.

A unit increases in income of the peoples increases the demand for coffee on average by 0.6 units reaping other variables constant

Since there is a positive relationship between income and demand (normal goods) the expected sign of the coefficient of X is also in line with the theory.

The value of R²=0.63 represents that the explanatory variable (P,T and X) explains 63% of the change in demand for coffee