Question

Exercise 4.6

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The demand for haddock has been estimated as:

log(Q)=a+b log(P)+c log(I)+d log(Pm)log⁡Q=a+b log⁡P+c log⁡I+d log⁡Pm

where

QQ = quantity of haddock sold in New England

PP = price per pound of haddock

II = a measure of personal income in the New England region

PmPm = an index of the price of meat

Suppose b=−2.174b=−2.174 , c=0.461c=0.461 , and d=1.706d=1.706 .

What is the price elasticity of demand?

-2.174

-4.716

0.461

1.706

What is the income elasticity of demand?

-2.174

0.270

1.706

0.461

What is the cross price elasticity of demand?

1.706

-2.174

0.461

3.701

According to the estimated model, the demand for haddock is selector 1   

• elastic
• inelastic

with respect to price. Suppose disposable income is expected to increase by 5 percent next year. Assuming all other factors remain constant, the quantity of haddock demanded next year will selector 1   

• decrease
• increase

by selector 2   

• 0.461
• 1.350
• 2.305

percent.

Answer 1