Question

The log-log demand function for Beckler's Frozen Pizzas is: lnQX = 4 – 0.70 lnPX - 0.50 lnPY + 1.5 lnS + 1.2lnA + 0.40 lnI

The number of pizzas sold per week (QX) depends on the price charged for a pizza (PX), the price charged for a cheese sticks (PY), the percentage of single-parent families (S), monthly advertising expenditures (A) in thousands, and average annual household income (I) in thousands. Answer the following questions by filling in the table below:

iv. What will be the percentage change in the number of pizzas sold if A increases by 5.0%?

v. Indicate whether Qx is elastic or inelastic with respect to single-parent families (S). And why?

vi. The manager of Beckler's plans to increase its price by 5%. How will you advise him, and why?

Answer 1

Since the model is in double log form

Then every coefficient measures elasticity.

Thus answer 4)

Now elasticity of quantity demanded of pizza wrt A is 1.2

Thus if A increases by 1% , then Q increase by 1.2%

So if A rise by 5% , then percentage change in number of pizza sold is 5*1.2 = 6%.

Answer 5) elasticity of Q wrt S is 1.5

So Q is elastic wet S, as e >1

( e is elasticity)

Answer 6) if price increase by 5% , fall in quantity demanded is 5*.7O% = 3.5%

So fall in quantity demanded of pizza is not much higher, thus total revenue will rise by (5-3.5)% = 1.5%

So advice is to increase price