The demand function for good X is ln QXd = a + b ln PX + c ln M + e, where Px is

Question

The demand function for good X is ln QXd = a + b ln PX + c ln M + e, where Px is the price of good X and M is income. Least squares regression reveals that: If M = 55,000 and Px = 4.39, compute the own price elasticity of demand based on these estimates. Determine whether demand is elastic or inelastic. Own price elasticity of demand: If M = 55,000 and Px = 4.39, compute the income elasticity of demand based on these estimates. Determine whether X is a normal or inferior good. Income elasticity of demand:

Explanation / Answer

own price elasticity of demand = dlnQ/dlnP = b = -2.18

2.18>1, hence the demand is elastic

income elasticity of demand = dlnQ/dlnM = c = 0.34

0.34>0, hence it is a normal good

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