Question

Demand Estimation
Choose a product of your interest to determine the most important determinants of its demand. You need to develop this into a generic demand function of the form
Qx = a0 + a1 Px + a2 I + a3 Py ……
Explain the;
i- Significance of each of the selected variable (include industry specific variables)
ii- Sign of each of the coefficients (expected/estimated use some secondary data evidence to support this)
iii- Impact/size of each of the coefficient (expected/estimated use some secondary data evidence to support this)

Answer 1

Answer on Question # 76392, Economics -Microeconomics:

Question: Demand Estimation:

Choose a product of your interest to determine the most important determinants of its demand. You need to develop this into a generic demand function of the form

$$Q_x = a_0 + a_1 P_x + a_2 I + a_3 P_y \dots$$

Explain the:

i. Significance of each of the selected variable (include industry specific variables).

ii. Sign of each of the coefficients (expected/estimated use some secondary data evidence to support this).

iii. Impact/size of each of the coefficient (expected/estimated use some secondary data evidence to support this).

Solution: The generic demand function is given by,

$$Q_x = a_0 + a_1 P_x + a_2 I + a_3 P_y \dots$$

i. Here, variables are $P_x$, $P_y$ and I.

$P_x$ is price per unit of product x

$P_y$ is price per unit of related product y.

I is consumer income.

ii. Here, co-efficients are $a_0$, $a_1$, $a_2$ and $a_3$.

$a_0$ is positive.

$a_1$ is negative.

$a_2$ is positive.

$a_3$ is positive.

Example: $Q_x = 400 + (-5)P_x + 2I + (1)P_y \dots$

iii. Co-efficients $a_0$, $a_1$ has high impact on the generic demand function but $a_2$ and $a_3$ has low impact on generic demand function.

Answer: i. $P_x$, $P_y$ and $l$.

ii. $a_0$ is positive.

$a_1$ is negative.

$a_2$ is positive.

$a_3$ is positive.

iii. $a_0$, $a_1$ has high impact but $a_2$ and $a_3$ has low impact.

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