Result between 2000 and 2008. Log QADD = 5.80 – 1.50 Log PADD + 5.75 Log PNIK +

Question

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?

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?

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

i) Elasticity is mire in long run as consumer can shift to other substitutes products in the long run. He can also alter his habits in long run in which case demand is more elastic in long run.

ii) In short run, cross price elasticity with respect to PNIK is 5.75, showing that it is a substitute good. Increase in price of this good by one unit leads to increase in demand for the original good by 5.75%. The coefficient of POP shows that it is also a substitute good. Increase in price of this good (POP) leads to increase in quantity demand of the original good by 3.80%. In the long run, the cross price elasticity with respect to good PNIK increases while that for good POP decreases.

iii) In short run and long run demand will be 5.80

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