The empirical demand function for good X is estimated in log-linear form as ln Qˆ = 11.74209 – 1.65 ln P + 0.8 ln M – 2.5 ln PY where Qˆ is the estimated number of units of good X demanded, P is the price of X, M is income, and PY is the price of related good Y. (All parameter estimates are significantly different from 0 at the 5 percent level.)
a. Is X a normal or an inferior good? Explain.
b. Are X and Y substitutes or complements? Explain.
c. Express the empirical demand function in the alternative (nonlogarithmic) form: Qˆ =_______.
d. At P = 50, M = 36,000, and PY = 25, what are the estimated price (Ê), income (ÊM), and cross-price elasticities (ÊXY)? What is the predicted number of units of good X demanded?