QADD = f ( PADD, PNIK, POP, Y) . Where; QADD represents the quantity of Addidas
ID: 1126844 • Letter: Q
Question
QADD = f ( PADD, PNIK, POP, Y) . Where; QADD represents the quantity of Addidas shoes demanded in North Cyprus PADD represents the price of Addidas shoes PNIK is the price of Nike shoes POP represents the total population and Y is the general income level. Result between 2000 and 2008. Log QADD = 5.80 – 1.50 Log PADD + 5.75 Log PNIK + 3.80 log POP + 0.80 Log Y+ t ....(1) You ran another regression from 2009 to 2016 and observed the following; Log QADD = 5.80 – 1.90 Log PADD + 5.80 Log PNIK + 2.50 log POP + 1.30 Log Y+ t .................(2)By comparing equations 1and 2. (i) Is the price elasticity more elastic in the short run than the long run? Why? (ii) Compare the cross elasticities in the equations (iii) If the elasticities all equals zero(0), what would be the demand for Addidas shoes?
QADD = f ( PADD, PNIK, POP, Y) . Where; QADD represents the quantity of Addidas shoes demanded in North Cyprus PADD represents the price of Addidas shoes PNIK is the price of Nike shoes POP represents the total population and Y is the general income level. Result between 2000 and 2008. Log QADD = 5.80 – 1.50 Log PADD + 5.75 Log PNIK + 3.80 log POP + 0.80 Log Y+ t ....(1) You ran another regression from 2009 to 2016 and observed the following; Log QADD = 5.80 – 1.90 Log PADD + 5.80 Log PNIK + 2.50 log POP + 1.30 Log Y+ t .................(2)By comparing equations 1and 2. (i) Is the price elasticity more elastic in the short run than the long run? Why? (ii) Compare the cross elasticities in the equations (iii) If the elasticities all equals zero(0), what would be the demand for Addidas shoes?
QADD = f ( PADD, PNIK, POP, Y) . Where; QADD represents the quantity of Addidas shoes demanded in North Cyprus PADD represents the price of Addidas shoes PNIK is the price of Nike shoes POP represents the total population and Y is the general income level. Result between 2000 and 2008. Log QADD = 5.80 – 1.50 Log PADD + 5.75 Log PNIK + 3.80 log POP + 0.80 Log Y+ t ....(1) You ran another regression from 2009 to 2016 and observed the following; Log QADD = 5.80 – 1.90 Log PADD + 5.80 Log PNIK + 2.50 log POP + 1.30 Log Y+ t .................(2)By comparing equations 1and 2. (i) Is the price elasticity more elastic in the short run than the long run? Why? (ii) Compare the cross elasticities in the equations (iii) If the elasticities all equals zero(0), what would be the demand for Addidas shoes?
Explanation / Answer
a).
Consider the given problem, here we have given a model of demand for “Addidas Shoes”. So, here (1) be the SR equation and (2) be the LR equation. Consider these 2 equations.
Log QADD = 5.80 – 1.5*log PADD + 5.75*log PNIK + 3.8*log POP + 0.8*log Y .............(1).
Log QADD = 5.80 – 1.9*log PADD + 5.8*log PNIK + 2.5*log POP + 1.3*log Y ................(2).
So, in the SR if “PADD” increases by 1% then “QADD” will fall by “1.5”, => the here the elasticity is “-1.5” in the SR, and “-1.9” be the same in the LR. So, since 1.9 > 1.5 => in the LR price elasticity is more elastic.
As, we know that there is a negative relationship between “P” and “quantity demanded”, when in the SR “P” increase, people reduced their demand little bit, but in the LR when they realised that the “P” has increased permanently, they reduced their demand further. This because in the SR people can’t adjust it’s habit quickly with the give situation, it’s take time to fully adjust. So, the LR demand curve is more elastic compared to the SR demand curve.
b).
In the SR if “PNIK” increase by 1% then “QADD” will increases by “5.75%” and in the LR it is “5.8%”. which implied that “cross price elasticity” is also more elastic in the LR compared to SR.
c).
Now, if all the elasticities are equal to “0” then the “logQADD = 5.8”, both in the SR as well as in the LR.
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