COVER PAGE

PURPOSE OF THE STUDY:

The present exercise aims to develop a demand equation for Burger
King as mandated by the firm. Two variables that explain the demand
for Combination1 meals are price of the combination and the
advertising spend on it. There are other factors that impact on demand
but these are assumed to be constant for the period of the analysis.
These include population, income levels and prices of competing meals
at rivals like Mc Donalds. The first two are positively related to
demand. We can expect that as income and/or population rises
demand will rise. The effect of rivals prices is not so clear and can be a
significant explanatory variable for demand. Data limitations do not
allow us to use these variables.
Price of the Combination is the most important variable that can
impact on demand. As per the law of demand it is negatively related to
demand. Higher is price, lower is demand.
The amount of money spent can be expected to increase demand in a
positive manner. Both these relations are borne clearly in the
regression results.
THE STATEMENT OF THE PROBLEM
To begin with our exercise aims to test the above mentioned
effects on demand.
We can also check the statistical significance of the variables
independently.
We also check for the overall significance of both variables
price and advertising expenditure on demand levels.
We start with a descriptive summary of the three variables given. Table
1 allows us to conclude:

The mean value for P is 3.506, for A it is 10008.94 and for Q it is

58918.86

Q and A are positively skewed, so that the highest occurring

values are on the lower end.

Prices are negatively skewed which implies that the prices with
highest frequency are at the higher end of the range.

The coefficient of variation is the highest for advertising spend

and lowest for prices. This is expected and lower variation in
prices is good for consumers.

The correlation matrix for the variables is given in table 2. P and

Q have a negative correlation as expected due to law of demand.
A and Q are also positively related; higher ad spend leads to
greater demand. A and P are related in a negative manner.
Higher is the ad spend greater is demand and lower is price. All
these correlations are along expected lines.
REGRESSION RESULTS:

Based on the descriptive information above we regress the following

model:
Qi=a+bPi+Ai

i=1.252

Where,
Q=quantity demand for meal
P=price
A=advertisement .The results are in table 3
Here, we use an ordinary least square method as we clearly have one
dependent variable, and 2 independent variables. There is no system
of equations to warrant a 2SLS method. This is needed if we had a
supply and demand equations / a model to estimate.
The regression equation is given by:
Q=100626

-16392.7P

+1.576334A

R^2=0.263783

(19216.4)

(5105.305)

(0.603179)

standard error
The goodness of fit of the model uses the R^2 value =0.263783. this
shows that only 26.3% variation in quantity demanded can be
explained by price and advertisement expenditure. Thus the model is
not a good fit. This is possible as we have left out other variables like
income, population and prices of rival products, season, no. of varieties
offered, etc.
However we can still look at F test and t test results, given in Table 4.
The intercept tells us that 100626 units will be demanded when both P
and A become 0. This is like a base level demand. As p value for the t
statistic of the intercept coefficient is less than .01, it is significant at
1% level, i.e, this intercept is significant.
The coefficient of P is -16392.7- is P increases by a unit, Q falls by
-16392.7 . This negative coefficient of P also satisfies the inverse
relationship between price and quantity demanded.
As p value for the t statistic of the coefficient of P is less than .01, it is
significant at 1% level, i.e, this price significantly affects quantity. The
coefficient of A is 1.576334 so that is P increases by a unit, Q increases
by 1.576334 units. As p value for the t statistic of the coefficient of P is
less than .05, it is significant at 5% level, i.e, this price significantly
affects quantity.
Table 5 gives the elasticity calculations. Price elasticity is defined as
the ratio of % change in quantity demanded to % change in price =
coefficient of P*(average value of P/average value of Q) the result is
-0.97566. in simple words, if price increases by 10%, Q falls by
9.7566%, i.e, demand is price inelastic. In the same way advertising
elasticity =% change in quantity demanded/% change in
advertisement expenditure= coefficient of A*(average value of
A/average value of Q). it works out to 0.267782. So, as price increases
by 10%, Q increases by 2.67782%, i.e, demand is price inelastic.

If the owner plans to charge a price of $4.15 for a Combination 1 meal

and spend $18,000 per week on advertising, then predicted sales
=100626-(16392.7*4.15)+(1.576334*18000)= 60970.3.
The equation of inverse demand function:
Q=100626-(16392.7P)+(1.576334*18000)
Or, Q=129000-16392.7
Or, P=(129000-Q)/ 16392.7
For Q=50000
Required demand price:
P=(129000-50000)/ 16392.7
=4.81922

APPENDIX
TABLE 1
Q

Kurtosis

58918.865
38
3037.8959
28
57894
21906.579
07
47989820
6.7
0.0995278
57

Skewness
Range
Minimum
Maximum
range
coeff of
varaiation

0.1162613
09
106796
11321
118117
106796
0.3718092
49

3.50673076
9
0.07295979
2
3.65
0.52612054
5
0.27680282
8
1.03615419
1
1.15536457
5
2.31
1.85
4.16
2.31
0.15003163
3

Mean
Standard
Error
Median
Standard
Deviation
Sample
Variance

A
10008.94231
617.5310939
9570
4453.080046
19829921.9
0.352783657
0.638771449
17350
3875
21225
17350
0.444910152

TABLE 2

Q
P
A

0.40145635
4
1

TABLE 3

Intercept
P
A

Coefficien
ts
100626
-16392.7
1.576334

Standard
Error
19216.4
5105.305
0.603179

0.329966608
-0.06195602
1

TABLE 4

100626

Standa
rd
Error
19216.
4

-16392.7
1.57633
4

5105.3
05
0.6031
79

Coefficie
nts
Interce
pt
P
A

t Stat
P-value
5.2364
3.42E67
06
3.2109 0.0023
1
38
2.6133 0.0118
75
74

TABLE 5
elasticity
calculation
Q
P
A
average
58918. 3.5067 10008.
values
87
31
94
16392. 1.5763
coefficient
7
34
0.9756 0.2677
elasticity
6
82