Suppose Fiberboard Inc. has estimated its log-linear demand function for cardboa

Question

Suppose Fiberboard Inc. has estimated its log-linear demand function for cardboard boxes as:

[ln(Boxes)] = 90 – 2.4[ln P] + 1.5[ ln(M)] + 0.3 [ln(Advt)]

Where:         Boxes is the quantity of boxes P is the own price

M is market income

Advt is expenditures on advertising And:         ln denotes the natural logarithm

What is the price elasticity of demand?

Is advertising expenditures elastic?

Assuming each of these variables is statistically significant, how would the consumption of the boxes change if there is a simultaneous 10% reduction in price, a 5% reduction in income, and a 20% reduction in advertising?

Explanation / Answer

1. Price elasticity of demand: The coefficient of Ln price represents the elasticity which is -2.4
2. Since the value 0.3, coefficient of Ln(Advt) is less than 1 advertising expenditures is inelastic
3. The interpretation of elasticity is
1-(2.72^((Coeff)*LN(1.01))), means for a 1 percent increase in variable, the sales would be affected by the value.
Hence for a 10% reduction in price+5% reduction in income+20%reduction in advertising

Consumption of box=(1-(2.72^((-2.4)*LN(1.01)))+(1-(2.72^((1.5)*LN(1.05)))+(1-(2.72^((0.3)*LN(1.2))))))

= 2.36%-7.6%-5.63%

= -10.86%

Related Questions

Navigate

• Browse (All)
• Browse S
• Subjects

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