Question

A small business firm examined buyer characteristics to forecast the amount charged by credit card clients. The firm collected yearly income, household size, and yearly credit card charges for a sample of 50 customers. The data collected are presented in the table below.

Income (£1000s) Household Size Amount Charged (£)
104 4 4516
80 4 3659
82 4 5600
100 6 5242
81 4 2364
105 2 4570
87 2 3231
90 4 3848
116 4 5264
101 4 4610
75 5 4708
98 4 4719
77 2 2977
83 4 3014
115 3 4714
113 5 5465
92 8 4912
71 2 2948
94 2 3495
87 7 4671
112 6 6178
71 4 4123
105 9 5801
92 2 3520
91 8 5328
104 8 6073
80 1 3083
98 3 4366
84 7 4086
117 4 5537
100 3 4105
117 7 5845
105 6 5870
102 3 4390
112 5 5205
114 2 4657
72 4 4079
79 6 4390
89 2 3472
85 2 3621
89 6 4683
104 3 4230
73 7 4627
77 4 3421
76 7 5103
111 3 4773
80 4 3567
72 4 3574
96 6 5320
116 6 5649

Your Task:
Develop two estimated regression equations:

Answer 1

The subject is Business at the College level. It discusses the impact of a price ceiling on credit card market equilibrium, explaining how it leads to increased demand, decreased supply, and eventually, a credit shortage where demand exceeds supply.

Step-by-step explanation:

The discussion provided pertains to the subject of Business, specifically focusing on credit market dynamics, and falls under the educational level of College. To answer the question about the credit card market, we must look at the impact of a price ceiling on the market equilibrium. The scenario posits a law that caps interest rates on credit cards, setting them below the natural market-clearing level. As a result, the demand for credit cards increases due to the lower interest rates, while the supply of credit cards diminishes because credit card companies are less inclined to lend at lower interest rates. This leads to a credit shortage where the demand exceeds the available supply, and consequently, some consumers are unable to obtain credit cards at the capped interest rates.

In the example given, the imposition of a price ceiling (interest rate Rc) causes a shortage in the credit card market. This happens because at the artificially low interest rate, more people want credit cards (quantity demanded increases from Qo to Qd), but credit card companies are less willing to issue them at this lower rate (quantity supplied decreases from Qo to Qs), leading to an excess of demand over supply. The practical effect of this is that even those who are willing to pay the prevailing interest rate ($R_c$) might not be able to receive a credit card.