Smith Corp. has the following demand function: Q+= a + bP + cM + dPr, where Q is the quantity demanded of the product Smith Corp. sell, P is the price of that product, M is income, and Pr is the price of the related product.
where Q is the quantity demanded of the product Smith sells, P is the price of that product, M is income, and PRis the price of a related product. The regression results are:
|
DEPENDENT VARIABLE:
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Q
|
R-SQUARE
|
F-RATIO
|
P-VALUE ON F
|
|
OBSERVATIONS:
|
32
|
0.7984
|
36.14
|
0.0001
|
|
VARIABLE
|
|
PARAMETER
ESTIMATE
|
STANDARD
ERROR
|
T-RATIO
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P-VALUE
|
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INTERCEPT
|
|
846.30
|
76.70
|
11.03
|
0.0001
|
|
P
|
|
-8.60
|
2.60
|
-3.31
|
0.0026
|
|
M
|
|
0.0184
|
0.0048
|
3.83
|
0.0007
|
|
PR
|
|
-4.3075
|
1.230
|
-3.50
|
0.0016
|
Now assume that the income is $10,000, the price of the related good is $40, and Conlan chooses to set the price of its product at $30.
b. What is the estimated number of units sold given the data above?
c. What are the values for the own-price, income, and cross-price elasticities?
d. If P increases by 5%, what would happen (in percentage terms) to quantity demanded?
e. If M increases by 8%, what would happen (in percentage terms) to quantity demanded?
f. If PR decreases by 4%, what would happen (in percentage terms) to quantity demanded?