Segment 3 (20 points) – use the below table for all questions related to Segment 3
You are the brand manager for a national brand of soft drinks. You are considering anational advertising campaign for the month of June. Your options are to spend $1M,
$2M or $3M on that campaign. You have access to historical data that links monthlysales to advertising spending. You regress monthly wholesale sales (in number of cases)
on monthly dummy variables, on the amount (in dollar) spent on advertising during thesame month, on this amount squared, on the amount spent on advertising the previous
month (lagged advertising spending), and on this amount squared. The output from theregression is reproduced below.
Coefficients P-value
Intercept 1,504,957 0
Jan -534,891 0
Feb -493,373 0
Mar -393,334 0
Apr -430,343 0.01
May -237,217 0
Jul 235,276 0
Aug 356,731 0
Sep -34,012 0
Oct -105,955 0
Nov -298,864 0
Dec -426,838 0
advertising spending 0.9 0.03
(advertising spending) -0.00000009 0.032
lagged advertising spending -0.24 0.03
(lagged advertising spending) 0.00000004 0.03
Your contribution (i.e., margin) per case of soft drinks is $2.
2
1 ptsQuestion 19
On average 1,504,957 cases are sold in a
month in June if there is no advertising in
June and there was no advertising in May
On average 1,504,957 cases are sold per
month in the data
Profit is maximized when $1,504,957 is spent
on advertising
Q3.1: What is the meaning of the intercept in the above table?
2 ptsQuestion 20
There is no data for June
June is set as the baseline
This is a mistake
Q3.2: Why does the table not include a coefficient for June?
2 ptsQuestion 21
Each coefficient represents the average
number of cases sold that month
Each coefficient represents the average
number of cases sold that month compared
to June
Each coefficient represents the average
advertising spending that month
Q3.3: Interpret the signs of the month dummy variables.
2 ptsQuestion 22
Increasing advertising budget in a given
month tends to decrease demand that month
and increase demand the next month
Increasing advertising budget in a given
month tends to increase demand that month
and increase demand the next month
Increasing advertising budget in a given
month tends to increase demand that month
and decrease demand the next month
Q3.4: Interpret the signs and magnitudes of the coefficients for “advertising spending”and “lagged advertising spending.”
2 ptsQuestion 23
There are diminishing returns to advertising
There are constant returns to advertising
Q3.5: Interpret the signs of the coefficients for “(advertising spending) ” and “(laggedadvertising spending) ” 22
There are increasing returns to advertising
3 ptsQuestion 24
$200,000
$220,000
$240,000
Q3.6: According to the regression results, what will your total incremental profit be ifyou spend $1M on advertising in June?
3 ptsQuestion 25
$160,000
$240,000
$320,000
Q3.7: According to the regression results, what will your total incremental profit be ifyou spend $2M on advertising in June?
3 ptsQuestion 26
-$120,000
$60,000
$240,000
Q3.8: According to the regression results, what will your total incremental profit be ifyou spend $3M on advertising in June?
2 ptsQuestion 27
$1M
$2M
$3M
Q3.9: According to the regression results, should you spend $1M, $2M, or $3M onadvertising in June?