Question

In: Economics

General Cereals is using a regression model to estimate the demand for Tweetie Sweeties, a whistle-shaped,...

General Cereals is using a regression model to estimate the demand for Tweetie Sweeties, a whistle-shaped, sugar-coated breakfast cereal for children. The following (multiplicative exponential) demand function is being used: QD = 6,280P−2.15 A1.05 N3.70

where QD = quantity demanded, in 10 oz: boxes

P = price per box, in dollars

A = advertising expenditures on daytime television, in dollars

N = proportion of the population under 12 years old

a. Determine the point price elasticity of demand for Tweetie Sweeties.

b. Determine the advertising elasticity of demand.

I know the answers given in the textbook solutions

a. -2.15

b. 1.05

But for part a, it shows a big equation but is that even necessary as the answer is -2.15 which is the exponent of P, given P=price per box, in dollars. Same scenario for b. I am asking is the question actually asking us to interpret in words the meaning of the coefficients of each of the independent variables?

Solutions

Expert Solution

Elasticity of demand is given by the percentage change in quantity demanded divided by percentage change in price.

Answers: (a) -2.15 and (b) 1.05

The question is not asking to interpret the coefficients, it is asking just to determine the elasticities and show the steps to calculate it. You need to understand why is the answer equal to the coefficients. It is because this is a double log regresion model and the coefficients of this regression model represent elasticities.

Please refer to below image for the required steps:

Rahul Sunny answered 8 months ago
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