Profit Probability Estimation

question 12

Essay

Profit Probability Estimation. Intimate Lighting, Inc., is a rapidly growing lighting accessory outlets that caters to the do-it-yourself home remodeling market. During the past year, 18 stores were operated in small to medium-size metropolitan markets. An in-house study of sales by these outlets revealed the following (standard errors in parentheses):
Standard Error of the Estimate = 500.
Here, Q is unit sales, P is unit price, P_X is the average unit price at competitor stores, A is advertising expenditures, and I is income per capita.
A. Tucson, Arizona was a typical market covered by this analysis. In the Tucson market, "own" price was $60, competitor price was $45, advertising was $13,500, and income was an average $80,000. Calculate and interpret the expected level of unit sales, as well as the 95% and 99% confidence regions for actual sales.
B. Calculate the 95% and 99% confidence regions for actual revenues in the Tucson market.
C. Estimate the probability that the Tucson store made a profit during this period if total costs were $1,735,200.

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Definitions:

Quantity Theory

An economic theory that suggests the general price level of goods and services is directly proportional to the amount of money in circulation.

Laissez Faire

An economic philosophy advocating for minimal governmental intervention in the marketplace and the free operation of supply and demand forces.

Say's Law

The principle that supply creates its own demand, meaning production necessarily leads to an equivalent level of demand in the economy.

Monetarists

Monetarists believe in the control of the supply of money as the primary method of controlling inflation and stabilizing the economy.