Question

11. Below is a scatterplot of data taken from a retail store to estimate the relationship between prices and quantities sold of their goods. What is the store attempting to estimate and does it appear that their customer base is "rational"?

Answer 1

Answer :

The above given scatterplot basically shows how prices and quantities sold by the retail store are correlated.

What the store is trying to identify is the form of correlation between price and quantity of the good they sell, that is whether it's a negative correlation or a positive one or none and based on that further regression analysis can be carried out in order to formulate a functional relationship between the two in order to estimate or predict the future outcomes. Now here the scatterplot is clearly showing a good negative correlation between price and quantity (based on the data available to the retail store). Thus the basic intuition from this plot is that price and quantity sold vary inversely, that is when prices are high lower quantities of goods are sold and when prices are low higher quantities of goods are sold.

Also this plot clearly confirms the fact that the customer base of this store is "rational". Since the buying pattern confirms with the law of demand which states that other things being constant, an increase in price of a good will decrease the quantity demanded of that good and vice versa. That is what is happening in this scenario thus showing rational behavior by the customers.