3. The following linear demand specification is estimated for Conlan Enterprises

Question

3. The following linear demand specification is estimated for Conlan Enterprises, a price-setting firm wbere Q is the quantity demanded of the product Conlan Enterprises sells, P is the price of that product, M is income, and Ppis the price of a related product. The results of the estimation are presented below: DEPENDENT VARIABLE: Q R-SQUARE F-RATIO 36.14 STANDARD P-VALUE ON F OBSERVATIONS: 32 0.7984 0.0001 ESTIMATE 846.30 -8.60 0.0184 -4.3075 T-RATIO 11.03 -3.31 3.83 -3.50 P-VALUE 0.0001 0.0026 0.0007 0.0016 VARIABLE ERROR 76.70 2.60 0.0048 1.230 INTERCEPT PR Assume that the income is $10,000, the price of the related good is $40, and Conlan chooses to set the price of this product at $30. At the prices and income given above, what is the price elasticity of demand? -0.43 -0.86 1.00 C. -2.40

Explanation / Answer

Option (a).

Estimated regression equation is

Q = 846.3 - 8.60P + 0.0184M - 4.3075PR

Plugging in given values,

Q = 846.3 - (8.6 x 30) + (0.0184 x 10,000) - (4.3075 x 40)

Q = 846.3 - 258 + 184 - 172.3

Q = 600

Price elasticity of demand = (dQ/dP) x (P/Q) = - 8.6 x (30 / 600) = - 0.43

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