Question: Elasticity Estimation. Breakaway Tours, Inc., has estimated the following multiplicative demand function for packaged holiday tours in the Flushing, NY, market using quarterly data covering the past five years (20 observations):
Qy = 5Py-2.5Px1Ay2Ax1I2
R2 = 0.90, Standard Error of the Estimate = 10
Here, Qy is the quantity of tours sold, Py is the average tour price, Px is the average price for some other good, Ay is tour advertising, Ax is advertising of some other good, and I is per capita disposable income. The standard errors of the exponents in the preceding multiplicative demand function are:
bpy = 0.5y bpx = 0.55y bAy = 0.8y bA x= 0.6y and bI = 0.8
A. Is tour demand elastic with respect to price?
B. Are tours a normal good?
C. Is X a compliment good or a substitute good?
D. Given your answer to Part C, can you explain why the demand effects of Ay and Ax are both positive?