The following is the demand function of a traditional design of swimwear (Q – in units of swimwear) for Dolphin Enterprises, a relatively new producer of swimwear. Demand for swimwear (Q) has the following functional relationship: Q = f(Ps, Pc, I, T) where: Ps is the price of the swimwear Pc is the price of the competitor’s swimwear I is the disposable income level for consumers T is an index of the tastes and preferences for the 18 to 21 year old market. A. Construct a linear demand equation for the above relationship. Please include the following terms in your model: b i is the parameter value of the independent variable, where i = 1, 2, 3, 4; and u is the error term. Be sure to include a constant parameter term (b 0 ) in the equation. B. Create the null and alternative hypothesis for the disposable income for swimwear variable (I) in your demand equation (in part 1). What type of statistical test would you use to test the significance of this demand function parameter if you were not sure if the product was a normal or an inferior good? C. If the estimated coefficient for the price of swimwear (b 1 ) in your regression equation was equal to (-95.8) and it found to be statistically significant at the 95% level, how would you interpret the impact of an incremental price decrease of swimwear (Ps) on the demand for your company’s swimwear to your boss?
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