A multiplicative demand function of the form: Qd = aPb1Yb2Pob3 is estimated using cross-sectional data and 224 observations. The regression results were as follows:
Constant (a) Price
(P) Income
(Y) Price of other good (Po)
Coefficient 0.02248 -0.2243 1.3458 0.1034
Standard Error 0.01885 0.0563 0.5012 0.8145
a. How should the coefficients be interpreted in this equation? Explain.
b. What is the quantity demanded if price is $10, income is $9000, and price of the other good is $15? Show your calculations.
c Is demand elastic or inelastic? How can you tell? What impact would a price increase have on total revenue? on total profit? Explain.
d How are these two goods related? Should the firm be concerned about a change in the price of the other good? Explain.
e. Is this product a luxury, necessity, or inferior good? Explain.