(a) Suppose the quantity of gadgets demanded is reported to have fallen by 20 units?from 50 to 30 units?as a result of a per-unit-price increase in widgets from $10 to $14, what is the cross-price elasticity of demand?. Explain your cross-price elasticity coefficient and graphically show and explain the consumer responses in both markets . As a manager, carefully explain why your estimated coefficient may or may not influence your pricing decision in this case.
(b) Suppose you estimate a double-log-demand function for widgets as follows:
Qd .2789-0.1647Pw (0.077) +0.5115i (0.415) +0.1483P-0.0089T (0.0026)-0.0961D(0.026);
where the standard errors are in parenthesis, Qd is for the quantity of widgets demanded, Pw is for the price of widgets, i is for disposable income, P is for the price of gadgets, T is for sales tax on widgets, and D is for household debt.
Assuming that there are 30 observations and that the R2 is 0.80, critically evaluate the regression model and results from a managerial point of view.
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Sep 21, 2019EXPERT
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