Colorful Tile, Inc., is a rapidly growing chain of ceramic tile outlets that caters to the do-it-yourself home remodeling market. In 2007, 33 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):
Q = 4 5P + 2A + 0.2I + 0.25HF
(3) (1.8) (0.7) (0.1) (0.1)
R2 = 93%, Standard Error of the Estimate = 6.
Here, Q is tile sales (in thousands of cases), P is tile price (per case), A is advertising expenditures (in thousands of dollars), I is disposable income per household (in thousands of dollars), and HF is household formation (in hundreds).
A. Fully evaluate and interpret these empirical results on an overall basis using R2, , F-statistic and SEE information
B. Is quantity demanded sensitive to “own” price?
C. Austin, Texas, was a typical market covered by this analysis. During 2007 in the Austin market, price was $5, advertising was $30,000, income was an average $55,000 per household, and the number of household formations was 4,000. Calculate and interpret the relevant advertising point elasticity.
D. Assume that the preceding model and data are relevant for the coming period. Estimate the probability that the Austin store will make a profit during 2008 if total costs are projected to be $300,000.