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5. The following log- linear demand curve for a price- setting firm is estimated using the ordinary least- squares method: Q= aP b M c

5. The following log- linear demand curve for a price- setting firm is estimated using the ordinary least- squares method:

Q= aPbMcPdR

DEPENDENT VARIABLE: LNQ

R-SQUARE

F-RATIO

P-VALUE ON F

OBSERVATIONS: 25

0.8587

89.165

0.0001

VARIABLE

PARAMETER ESTIMATE

STANDARD ERROR

T-RATIO

P-VALUE

INTERCEPT

6.77

4.01

1.69

0.0984

P

-1.68

0.70

-2.40

0.0207

M

-0.82

0.22

-3.73

0.0005

PR

1.35

0.75

1.80

0.0787

a. The estimated demand equation can be expressed in natural logarithms as:

lnQ =

b. Does the parameter estimated for b have the expected sign? Explain

c. Given these parameter estimates, is the good a normal or an inferior good? Explain Is good R a substitute or a complement? Explain.

d. Which of the parameter estimates are statistically significant at the 5 percent level of significance?

e. Find the following estimated elasticities:

a. The price of elasticity of demand ().

b. The cross- price elasticity of demand (XR)

c. The income elasticity of demand (M)

f. A 10 percent decrease in household income, holding all other things constant, will cause quantity demanded to _____________ (increase, decrease) by ___________ percent.

g. All else constant, a 10 percent increase in price causes quantity demanded to _______________ (increase, decrease) by __________ percent.

h. A 5 percent (5%) decrease in the price of R, holding all other variables constant, causes quantity demanded to ______________ (increase, decrease) by ___________ percent.

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