Exercise 4. Income Elasticity Estimation

You have a dataset on consumer behavior for different level of income, m, different prices, p, and different quantities purchased, x. You assume the following demand curve as a function of income and price: x = Am/p.

a)Elasticity of income, _m, is defined as percentage change in quantity given a percentage change in income: _m = %x/%m = (x/x)/(m/m) = (x/m)(m/x). What is the elasticity of income?

b)Taking the log of both sides of your demand curve you get ln(x) = ln(A) + ln(m) +ln(p). You run a linear regression and you estimate b=0.8. Is this good inferior/normal? Is your good a necessity/luxury?

c)Suppose that with data for another good you estimate b=-0.5. Is this good inferior/normal? Is your good a necessity/luxury?

d)Suppose that with data for another good you estimate b=1.2. Is this good inferior/normal? Is your good a necessity/luxury?