Answer to Question #291738 in Microeconomics for jay

Question

Explain, in plain words, what the R-square in this regression indicates. The demand function for good X is 𝐿𝑛𝑄𝑥 𝑑 = 𝑎 − 𝑏𝐿𝑛𝑃𝑥 + 𝑐𝐿𝑛𝑀 + 𝑒 . Where 𝑃𝑥 is the price of good X and M is income. Least squares regression reveals that â = 7.42 , bˆ = 2.81, cˆ =0.34, a. 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. (4mks) b. 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

Answer 1

a)The own-price elasticity of demand for the good when the income is 55000 and the price of good X is 4.39 is -2.81 The reason is that the coefficient of the Px in the log-linear regression model records the Price elasticity of the good X. The good X has an elastic demand.

b)The income elasticity of demand for the good when income is 55000 and the price of good X is 4.39 is 0.34. The reason is that the coefficient of M in the log-linear regression model records the Income elasticity of demand. The good is a normal good as the elasticity obtained is a positive figure.