The demand function good X is ln Qdx = a + b ln Px + c ln M+e, where Px is the price of good X and M is income. Least squares regression reveals that â = 5.25, b = – 1.36, and c = – 0.14.
a. If M = 45,000 and Px = 5.69, compute the own price elasticity of demand based on these estimates. Determine whether demand is elastic or inelastic.
b. If M = 45,000 and Px = 5.69, compute the income elasticity of demand based on these estimates. Determine whether X is a normal or inferior good.