Question

Assume that the estimated demand function for a product X is: ln Qxd = 9 –...

Assume that the estimated demand function for a product X is:

ln Qxd = 9 – 1.25 ln Px + 3.5 ln Py + 0.85 ln M + ln A

where Qxd is quantity demanded of product X,

Px is unit price of product X = $21,

Py is unit price of another product Y = $7.50,

M is average income of consumers of product X = $52,500, and

A is advertisement cost for product X = $425.

A. Clearly show your steps and determine the own-price elasticity of demand for product X. Explain whether demand for product X is elastic, inelastic, or unitary.

B. Clearly show your steps and determine the cross-price elasticity of demand between products X and Y. Explain the relationship (substitutes or complements) between the products.

C. Write the nonlinear functional form (equation) of the estimated demand function for product X. Clearly show your steps.

D. Determine the quantity demanded of product X at the stated levels of the independent variables. Clearly show your steps and manual (hand and calculator) calculations.

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