Question

(4 points) A client has provided you with data on the price of cars, the price of gasoline, the quantity of new cars sold in each of a number of countries. In addition you observe Gross Domestic Product per capita (GDP is a measure of national income and 'per capita' means per person.) Using regression, you have estimated the following market demand equation for new cars: 3. log Qcars 5-1.4 log Pcars-1.2 log Pgasoline + 0.5 log(GDP per capita). (1 pt) What is the estimated elasticity of demand for new cars with respect to the price of cars? (1 pt) What is the estimated cross-elasticity of demand for new cars with respect to the price of gasoline? (1 pt) What is the estimated cross-elasticity of demand for new cars with respect to GDP per capita? (1 pt) Use the equation to calculate the estimated elasticity of demand with respect to the price of cars when 1,000,000 new cars are shipped each year, average price of new cars is $30,000, average gas price is $2.50 per gallon, GDP is 1.3 trillion U.S. dollars, and 250 million people live in the country. a. b. c. d.

Answer 1

a) Estimated elasticity of demand is the coefficient of log of price for cars which is -1.4

b) Estimated cross elasticity of demand is the coefficient of log of price of gasoline which is -1.2

c) Estimated elasticity of demand is the coefficient of log of income or GDP per capita which is 0.5

d) Since it is a long linear demand, the elasticity value will not depend on the quantity or price of own good or related good. It will be fixed at the value of coefficient of log of price for new cars. Hence the elasticity under any value is still -1.4.