Suggested Solutions to Assignment 4 (Optional) - Trent University

ln Q 61 = 1.2789 − 0.1647(0.47) + 0.5115(1.29) + 0.1483(0.07) − 0.0089(61)
− 0.0961(1) − 0.1570(0) − 0.0097(0)
ln Q 61 = 1.2327. The antilog of 1.2312 is 3.43 lb.
This is the forecasted number of pounds of coffee consumed per capita for the
population over age 16 in the first quarter of 1978.
(d) By substituting the given values of the independent or explanatory variables,
t = 62, D 1 = D 3 = 0, and D 2 = 1, for the second quarter of 1978 in the estimated
demand equation, we get the second-quarter 1978 forecast of the demand for coffee
ln Q 62 = 1.2789 − 0.1647(0.38) + 0.5115(1.30) + 0.1483(0.05) − 0.0089(62)
− 0.0961(0) − 0.1570(1) − 0.0097(0)
ln Q 62 = 1.1799. The antilog of 1.1799 is 3.25 lb.
This is the forecasted number of pounds of coffee consumed per capita for the
population over age 16 in the second quarter of 1978.
(e) Since the estimated regression equation seems to fit the data reasonably well (it
explains 80 percent of the variation in Q t ) and we are using it to forecast Q t for
the next four quarters only, we can be reasonably confident in our forecast.
A sudden and unforeseen change in tastes (due, for example, to the finding that coffee
causes heart ailments) could cause the forecasted error to become very large. In that
case, the regression equation would have to be reestimated to reflect this structural
change before we could use it to generate forecasts in which we could have a great
deal of confidence.
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