Financial Risk Manager Part 1
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A limited liability company uses the ordinary least squares method to estimate a linear relationship between total monthly revenue and the total promotional expenditure. The linear function is found to have a positive slope that's significantly different from zero. Assuming that other variables, like product price and supply region, remain constant during the period covered by the data set, this implies that:
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NNikitesh
A
The company should significantly increase promotional expenditure
B
The company should significantly reduce promotional expenditure
C
Promotional expenditures have no effect on demand
D
Promotional expenditures have a significant influence on demand
Explanation:
The slope indicates the change noted in the dependent variable (sales) per unit change in the independent variable (promotional expenditure). Since the slope is positive, it confirms what economic theory might suggest: promotional events have an influence on demand for a product. The decision to increase promotional expenditure should be reviewed taking into consideration all the other business aspects.
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