The demand function for good x is In Qxd a b In Px c In M e, where P is the pric

Question

The demand function for good x is In Qxd a b In Px c In M e, where P is the price of good X and M is income. Least squares regression reveals that 7.42 -2.18 e 0.34 a. If M -55,000 and Px 4.39, compute the own price elasticity of demand based on these estimates. Determine whether demand is elastic or inelastic. own price elasticity of demand: Demand is Click to select) b. If M-55,000 and P 4.39, compute the income elasticity of demand based on these estimates. Determine whether X is a normal or inferior good. Income elasticity of demand X is Click to select)

Explanation / Answer

(a) The own price elasticity of demand is simply the coefficient of ln Px, which is 02.18 and more than 1 . Since this number is more than one in absolute value, demand is elastic.

(b) The income elasticity of demand is simply the coefficient of ln M, which is 0.34. Since this number is positive, good X is a normal good

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