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Using the estimated double-log model of demand below: Qy = 588.38Px-.33Py-.42I 1.16 identify the own-, cross-,...

Using the estimated double-log model of demand below:

Qy = 588.38Px-.33Py-.42I 1.16

identify the own-, cross-, and income-elasticity of demand and interpret them. Is the demand for commodity “Y” elastic or inelastic with respect to its own price? Is “X” a substitute or a complement of Y? Is “Y” a normal good or an inferior good? Make sure to explain your conclusions completely for full points.

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Expert Solution

Qy = 588.38 Px - 0.33 Py - 0.42 I + 1.16

1. Own- price elasticity of demand = (Change in Qy/ change in Py) (Py/ Qy)

Change in Qy/ Change in Py = - 0.33

Hence, own- price elasticity of demand is less than one by ignoring the negative sign. This implies that proportionate change in quantity is less than the proportionate change in price. Hence, demand for Y is inelastic with respect to its own price.

2. Cross-price elasticity of demand = (Change in Qy/ Change in Px) (Px/ Qy)

Change in Qy / Change in Px = 588.38

Hence, cross price elasticity is greater than one i.e positive . It implies that the increase in price of good X , increases the demand for Good Y . Hence, Good X is a substitute for Good Y.

3. Income elasticity of demand = (Change in Qy/ Change in I) (I / Qy)

Change in Qy/ Change in I = - 0.42

Hence, Income elasticity is less than one which implies that increase in income leads to decrease in the quantity demanded. Hence, Good Y is an inferior good.

Rahul Sunny answered 1 year ago
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