Answer to Question #47979 in Microeconomics for Alicia Barr

Question

An estimate of the demand function for household furniture produced the following results:
F = 0.0036Y ^1.08R^0.16 P^ 0.48 R^2=0.996
Where F = furniture expenditures per household
Y = disposable personal income per household
R = value of private residential construction per household
P = ratio of the furniture price index to the consumer price index
a. Determine the point price and income elasticities for household furniture.
b. What interpretation would you give to the exponent for R? Why do you suppose R was included in the equation as a variable?

Answer 1

F = 0.0036Y ^1.08R^0.16 P^ 0.48 R^2=0.996, where F = furniture expenditures per household, Y = disposable personal income per household, R = value of private residential construction per household, P = ratio of the furniture price index to the consumer price index.
a. Determine the point price and income elasticities for household furniture.
Point price elasticity of demand method is used to determine change in demand within same demand curve, basically a very small amount of change in demand is measured through point elasticity.
Ed = F'(P) = 0.16
Income elasticity of demand measures the responsiveness of the demand for a good to a change in the income of the people demanding the good, ceteris paribus. It is calculated as the ratio of the percentage change in demand to the percentage change in income.
Ed = F'(Y) = 0.0036
b. What interpretation would you give to the exponent for R? Why do you suppose R was included in the equation as a variable?
R - value of private residential construction per household, it is included in the equation as a variable, because it is important part of consumption.