Case 2: Demand Estimation and Forecasting

eData, Inc. is a small but rapidly growing firm that provides

electronic data processing services to companies, hospitals, and
other organizations. eData’s main business is to maintain and
monitor payroll records on a contractual basis, and to issue
payroll checks, W-2 forms, and so on to the employees of client
customers. During the past year, the company has aggressively
expanded its personal selling efforts and experienced a rapid
expansion in annual revenues. In a tough economic environment,
year-end sales revenue grew to $5.2 million, a rate of $62.4
million per year. For simplicity, assume that relevant factors
influencing eData’s monthly sales are as follows:

Units Sold, Price, Advertising and Personal Selling

Expenditures for eData, Inc.

Personal
Advertising
Units Selling
Month Price ($) Expenditures
Sold Expenditures
($)
($)
2,5 3,8 26, 43,
January 00 00 800 000
2,2 3,7 23, 39,
February 50 00 500 000
1,7 3,6 17, 35,
March 50 00 400 000
1,5 3,5 15, 34,
April 00 00 300 000
1,0 3,2 10, 26,
May 00 00 400 000
2,5 3,2 18, 41,
June 00 00 400 000
2,7 3,2 28, 40,
July 50 00 200 000
1,7 3,0 17, 33,
August 50 00 400 000
Septemb 1,2 2,9 12, 26,
er 50 00 300 000
3,0 2,7 29, 45,
October 00 00 800 000
Novemb 2,0 2,7 20, 32,
er 00 00 300 000
 Decemb 2,0 2,6 19, 34,
er 00 00 800 000
2,020. 3,175. 19,96 35,66
Average 83 00 6.67 6.67

If a linear relation between unit sales, contract price,

advertising and personal selling expenditures is hypothesized, the
eData regression equation takes the following form:

Sales = Yt = b0+bPPt+bADADt+bPSEPSEt+ut

where Y is the number of contracts sold, P is the average contract

price per month, AD is advertising expenditures, PSE is personal
selling expenses, and u is a random disturbance term – all
measured on a monthly basis over the past year.

When this linear regression model is estimated over the

eData, Inc. data, the following regression equation is estimated (t-
statistics in parentheses):

Unitst = -117.513-0.296Pt+0.036ADt+0.066PSEt

where Pt is price, ADt is advertising, PSEt is selling expense, and t-

statistics are indicated within parentheses. The standard error of
the estimate or S.E.E. is 123.9 units, the coefficient of
determination or R2 = 97.0%, the adjusted R2 = 95.8%, and the
relevant F statistics is 85.4.

A. What is the economic meaning of the b0 = -117.513 intercept

term? How would you interpret the value for each independent
variable’s coefficient estimate?
B. How is the standard error of the estimate (S.E.E.) employed in
demand estimation?
C. Describe the meaning of the R2 and the adjusted R2.
D. Use the eData regression model to estimate fitted values for
units sold and unexplained residuals for each month during the
year.