an estimate of the demand function for household furniture produced the followin

Question

an estimate of the demand function for household furniture produced the following results f= 0.0036y1.08r0.16p-0.48 r2=0.996 Where F = furniture expenditures per household Y= disposable personal income per household R = value of private residential construction per household and P = ratio of the furniture price index to the consumer price index

a. Determine the point price and income elasticities for household fruniture

b. What interpretation would you give to the exponent for R? Why do you suppose R was included in the equation as a variable?

Explanation / Answer

a.

Price point elasticity = % change in F / % change in price= dlog F/ dLog P

Price can be approximated by P

Taking logs of the given demand function we get a log log function. In this the coefficient itself is the elasticity value.

dLog F/dLog p = -0.48

income elasticity = dlogF/ dlog Y= +1.08

b.

R refers to the elasticity of expenditures on furniture with respect to private residential construction /household.

The value of .16 shows that when households raise their expenses on building a private house by 100% their expenses on furniture rises by 16%

This was included since the owners/ builders of private houses area large part of the demand for new furniture.

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.