Exhibit 36.2-1 Constant Returns to Scale (Linear) Model.
The simplest functional form is the
linear model which represents constant returns to scale:
$$ S=α+βX $$
Where:
- S is sales, the dependent variable, and
- X is the independent variable representing the
marketing effort for the marketing mix element.
- α and β are model parameters. α is the intercept —
the sales when there is no marketing effort. β is coefficient for X. A unit
change in X results in a change of β units in sales.
The linear model is theoretically unsound because it
suggests that sales increase indefinitely. However, from a practical viewpoint,
within a relatively small operating range, a linear model can provide a
satisfactory approximation of the true relationship.
