An empirical study by Huang, Siegfried and Zardoshty3 estimated a demand function for coffee in the United States between 1961 and 1977, using quarterly time-series data. The results were:

ln Qt =1.2789 - 0.1647 ln Pt + 0.5115 ln Yt+ 0.1483 ln Pt0-0.0089 T - 0.0961D1 - 0.1570D2 -0.0097D3

(- 2.14)(1.23) (0.55)(-3.326)(-3.74)(-6.03)(-0.37)

where

Q = pounds of coffee consumed per head

P = the relative price of coffee per pound at 1967 prices

Y = per capita personal disposable income (in $,000 at 1967 prices)

P 0= the relative price of tea per quarter pound at 1967 prices

T= thetrendfactor,withT=1for1961-ItoT=66for 1977-II

D1 = 1 for the first quarter

D2 = 1 for the second quarter

D3 = 1 for the third quarter

Questions

1 Interpret the PED for coffee; does price significantly affect consumption?

2 Interpret the YED for coffee; does income significantly affect consumption?

3 Interpret the CED between tea and coffee; does the price of tea significantly affect the consumption of coffee?

4 Why do you think that advertising expenditure is omitted from the equation?

5 Interpret the trend factor.

6 Interpret the seasonal pattern in coffee consumption in the USA.

7 How well does the model fit the data?