In the year 2007, the outbreak of a new disease affecting cattle had a devastating impact on the farm’s dairy industry in New Zealand. Known as ‘whooping cow disease’, fear of the virus quickly spread throughout the world causing people to avoid consumption of cattle and cattle related products such as dairy goods. Many brands of chocolate use milk or milk powder in their production. How do you think this virus would affect chocolate sales? At the same time, certain brands of chocolate do not use milk in their production. How do you think their sales will be affected? Refine the model you created in previous questions by adding a dummy variable to represent the one-off occurrence of ‘whooping cow disease’. In other words, estimate the following:
Where D = Disease dummy variable What is the overall impact of the disease? How do your findings compare to your observations in previous questions? Comment on your findings. [20 marks] Hint : To complete this step, you must create a dummy variable.
Having accounted for various time series effects, your client is now interested in how pricing affects sales. You must investigate own price effects as well as the price effects of various competitors. In other words, you need to estimate the following, taking into consideration only competitors’ pricing which are significant: Where Pt = Own price in period t Pktc = Price of the kth competitor in period t What is the effect of increasing the price of your own brand? What about the effect from competitors? Which competitors are relevant and which ones are not? Research on relevant information to compute the various elasticities. Why do you think your brand is affected by some competitors and not others? [20 marks] Hint: Different brands compete in different categories. This might be a good place to start.
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