The solution to Elasticity of demand
A client has provided you with data on the price of cars, the price of gasoline, the quantity of new cars sold in Country X. In addition you observe Gross Domestic Product per capita (GDP is a measure of national income and 'per capita' means per person.) Using the regression techniques that you learn in Ch 3, you use the data to estimate the following log-linear market demand equation for new cars:
ln Qcars = 5 - 2.4 ln Pcars - 1.2 ln Pgasoline + 0.5 ln (GDP per capita)
a. What is the estimated elasticity of demand for new cars with respect to the price of cars? What would happen to quantity of new cars sold if price of cars increases by 5%?
b. What is the estimated elasticity of demand for new cars with respect to the price of gasoline? What would happen to quantity of new cars sold if price of gas increases by 5%?
c. What is the estimated elasticity of demand for new cars with respect to GDP per capita?