ECONOMIC ANALYSIS

REGRESSION PROJECT

PREPARED BY:-

NAME STUDENT NO.

PREPARED FOR:-

SUBMISSION DATE: 15 JUNE 2019

 REGRESSION PROJECT

1. Estimated demand function for FCI’s rental units:

Y = α + β 1 P + β 2 A + β3 D
Y = 135.148 – 0.143 P + 0.538 A – 5.784 D

Y = Quantity demanded of FCI apartments

P = Price of rental
A = Advertising expenditure
D = Distance from each apartment building to
campus

Test 1 (Signs of Coefficients)

Variables Signs DV and IVs

relationship
P - P↑ Q↓ Consistent with Law of Demand
P↓ Q↑
A + A↑ Q↑ Consistent with economics
A↓ Q↓ theory
D - D↑ Q↓ Effect of distance as a factor in
D↓ Q↑ determining the demand

Test 2 (R2)

The R2 is equal to 0.7915, which means that 79.15% of the changes in the quantity
demanded of FCI apartments (DV) can be explained by the changes in the rental price,
advertising expenditure and distance of each apartment to campus (IVs). The remaining
20.85% is due to factors not included in the model.

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Test 3 (F Test)

HO : All βs = 0 P ≤ 0.05, Reject HO, model is significant

HI : At least one β ≠ 0 P > 0.05, Do not reject HO, model is insignificant

Since P = 0.0182, HO is rejected and thus the model is significant.

Test 4 (T Test)

HO : βI = 0 T > |2|, Reject HO, IV is significant

HI : β I ≠ 0 T < |2|, Do not reject HO, IV is insignificant

Variables T value T central value Decision Rule

P -2.408 >2 Reject HO, IV is significant

A 0.847 <2 Do not reject HO, IV is

insignificant

D -4.608 >2 Reject HO, IV is significant

Thus, Price and Distance are the IVs that appear to be statistically significant.

Test 5 (Standard Error of Estimate)

ŷ = ± 2 (S.E.E.)
ŷ = ± 2 (9.18)
ŷ = ± 18.36

Thus, the interval estimation is not very wide (relatively a low value of ± 18.36), which
means the estimated demand function gives a fairly good estimate.

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2. If FCI raised rents at one complex by $100, what would you expect to happen to the
number of units rented?

Generally, when price of rent in increased, the number of units rented will be
decreased as this is consistent with the Law of Demand. From the table given, the average
quantity of demanded apartment is 53.10. Let’s calculate the number of unit rented using
the new average of rental price. The new rental price average is $430 with the increased by
$100 in rents at one complex.

Y = 135.148 – 0.143 P + 0.538 A – 5.784 D

Y = 135.148 – 0.143 (430) + 0.538 (20.5) – 5.784 (5.7)
= 51.72

Thus, this new average quantity demanded of apartments decreased as per expected. The
estimated number of units rented will decrease to 517 from 531 with the increased by $100
in rents at one complex.

Another way to tackle the question is to look at the coefficient of the price, which is
-0.143. With the increase of $100 in the price,

100 x -0.143 = -14.3

So an increase in price of $100, leads to a 14 unit decrease in the quantity demanded of

apartments. This is consistent with the first method that we use above as 531 – 517 = 14

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3. If FCI raised rents at an average apartment building, what would happen to FCI’s total
revenue?

In order to answer this, we have to identify if the price elasticity of demand for the
apartments.
P Q 40(45)
EP =  (420 /53.1)
1.5.x -0.143 = -1.131 (elastic)
Q P 1200
Since the price elasticity of demand for the apartments is found to be elastic, if price (rents)
is increased, the quantity effect outweighs the price effect, causing a decrease in FCI’s total
revenue.

↓ Total Revenue = ↑ Price x ↓ Quantity

4. What inferences should be drawn from this analysis?

From the analysis, we found that The R2 is equal to 0.7915, which means that the
regression can explain 79.15% of the changes in the quantity demanded of FCI apartments
(by the changes in the rental price, advertising expenditure and distance of each apartment
to campus).

Multiple R = 0.89 shows a strong relationship as value of R > 0.8 means that the
relationship between explanatory variables and the response variable (quantity demanded
of FCI apartments) is strong.

From the Significance F = 0.0182, the model is significant and from the T-test, price and
distance are the only explanatory variables that appear to be statistically significant.
Advertising effect appears to be statistically insignificant towards the demand for the rental
units.

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Distance
The distance from campus is the most significant variable to the demand for the
apartments. The T-statistic for this coefficient is the highest with 4.608 in absolute value,
and the P-value is 0.0037. FCI can be 95 percent confident that for every mile that the
apartment is away from campus, FCI loses between 2.713 and 8.855 tenants, based on the
lower and upper bound of its confidence level. Since relocation of the apartments closer to
the campus is not feasible, perhaps focus can be directed towards the rental price.

Price
Rental price is a factor that perhaps FCI should pay attention to as the price elasticity of
demand for the apartments is found to be elastic (refer answer 3). Since the price elasticity
of demand for the apartments is elastic, if price (rents) is decreased, the quantity
effect outweighs the price effect, causing an increase in FCI’s total revenue. However, the
rental of each apartment building varies. It is advisable that FCI should restructure the
rental pricing. FCI could lower the rental of the apartment buildings where demand is
elastic, and increase the rental of the apartment buildings where demand is inelastic. As a
rule of thumb, the new rental pricing should be adjusted according to the distance of the
apartment building to campus; the closer to campus, the higher the rental.

Advertising
From the T test, we found that advertising does not have a statistically significant impact
on units rented. Thus, it is advisable that FCI reduce their advertising expenditure in order
to increase their total revenue. Alternatively, advertising efforts like advertisement or
classified ads or posters can be collectively for all buildings to cut the cost.