The demand for distilled spirits across all states in the United States was estimated to be Q = 1.27 - 0.037P + 0.000122I + 0.000242T. Q is yearly per capita quantity demanded in that state measured in gallons, I is state per capita disposable income, and T is total per capita expenditures by tourists in that state. Suppose that I = 16026 and T = $1,346, the mean levels for the United States. Given the above demand and these values of income and tourist spending:
Compute the price elasticity of demand for distilled spirits at a prices of $60, $55, $50, ..., $30 per gallon.
Do high-price states have larger or smaller demand elasticities for distilled spirits?
Relate this to what Chapter 3 says about the price elasticity as you move along a linear demand curve.
Suppose there is a state with annual per capita expenditures by tourists of T = $1,500.
Will that state have a higher or lower price elasticity than the average? Can you explain why?