## Quiz 5 :

Demand Estimation and Forecasting

Answer:

(a)

In order to find the compound growth rate of Sales in the period 2003 and 2012, follow the following steps:

1) Determine the number of years intervening between two sales periods: In the given case, it is 11 years. That means ,

2) Find the beginning period sales: In this case it is $230000 worth of sales corresponding to the sales period 2003. That means

3) Find the end period sales: In this case it is $873000 worth of sales corresponding to the sales period 2012. That means

4) Assume that the compound growth rate is

and apply the formula given by:

Hence, the compound growth rate of sales between 2003 and 2012 is:

(b)

Assume that the compound growth rate of sales that existed between 2003 and 2012 is the rate at which the sale is expected to grow in 2013 from the level that exists in 2012, the forecasted Sales figure for 2013 is:

The forecasted Sales figure for 2014 is:

(c)

In order to find the compound growth rate of Sales in the period 2007 and 2012, follow the following steps:

1) Determine the number of years intervening between two sales periods: In the given case, it is 11 years. That means ,

2) Find the beginning period sales: In this case it is $453000 worth of sales corresponding to the sales period 2007. That means

3) Find the end period sales: In this case it is $873000 worth of sales corresponding to the sales period 2012. That means

4) Assume that the compound growth rate is

and apply the formula given by:

Hence, the compound growth rate of sales between 2007 and 2012 is:

(d)

Assume that the compound growth rate of sales that existed between 2007 and 2012 is the rate at which the sale is expected to grow in 2013 from the level that exists in 2012, the forecasted Sales figure for 2013 is:

The forecasted Sales figure for 2014 is:

(e)

The major difference between the forecasted figures of sales for the period 2013 and 2014 is the difference in the constant compounded growth rate of sales being used.

At one side, the constant compounded growth rate estimated based on the period 2003-2012 is assumed to exist in each of the future years 2013 and 2014 which is 15.972% and on the other side, the constant compounded growth rate as estimated over the period 2007-2012 is assumed to exist in each of the future years 2013 and 2014, which is relatively lower at 14.0206% while forecasting Sales for 2013 2014

It shall also be observed that Y-o-Y growth rate of Sales shows a consistent decline. This explains as to why the compound growth rate of Sales over the period 2007-12 is less than the compound growth rate over 2003-2012

While deciding about the model to forecast the Sales figures for 2013 2014, the graph relating Sales performance over the period is observed. It shall be noted that, Sales shows an exponential rise, hence the model that would be appropriate here to fit the data for the purpose of forecasting is an exponential model of the form:

, where

and

are the constants.

This exponential form can also be written as:

The result is:

Hence, the forecasted value of

for 2013 is:

Hence, the forecasted Sales for 2013 are:

The forecasted value of

for 2014 is:

Now, substitute the forecasted sales value for 2013 in the below formula to get the forecasted sales for 2014.

Hence, the forecasted Sales for 2014 are

Answer:

The demand for European luxury automobiles is given as follows:

Where Q is the demand for European luxury automobiles;

P is the Price of European luxury automobiles; Pa is the price of American luxury automobiles; Pj is the price of Japanese luxury automobiles; and I is the Annual income of car buyers.

a. The substitutability between European and American car is explained by the coefficient of the factor Pa. The value of the coefficient is 0.75. It means that the substitutability is up to 75%. Therefore, they are not perfect substitutes.

b. The coefficient of income variable is 1.6. It means that with the increase in income, there will be a higher proportionate increase in demand. This is a expected result for the luxury goods because luxury goods are supposed to be income elastic.

c. The coefficient of European cur price is -0.93. This means that the decrease or increase in price by 1% will increase or decrease the demand by 0.93%. This is not expected because for luxury goods, price elasticity is likely to be elastic. One possible reason for getting an inelastic demand for luxury cars can be that buyers have a strong preference for luxury cars that is not influenced much by the price change.

Answer:

Qualitative method of forecasting is done based on the judgment and experience of individuals and groups who are considered to be experts in that respective domain.

Qualitative method can be done by taking opinions of a group of experts and then combining them to arrive to a conclusion. Another popular qualitative method is the Delphi method. In this method a group of experts are sent questionnaires through mail. The responses received from the experts are then are summarised without disclosing the identities. Further mails are then sent for clarification in situations where there are extreme views. The process is repeated till the group reaches to a reasonable agreement.

Qualitative forecasting can result in numerical results even though they are not based on historical data.

On the other hand, quantitative method on the other hand is primarily based on historical data and uses various causal relationships to predict the future. Some of the other methods used for quantitative forecasting are trend analysis and econometric models.