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elasticity estimation

Elasticity Estimation. Breakaway Tours, Inc., has estimated the following multiplicative demand function for packaged holiday tours in the Flushing, NY, market using quarterly data covering the past five years (20 observations).

(ss) = subscript (SS) = superscript

Q(ssy) = 5P(ssy)(SS-2.5)P(ssx)(SS1)A(ssy)(SS2)A(ssx)(SS1)I(SS2)

R^2 = 0.90, standard error of the estimate = 10

Here, Q(ssy) is the quantity of tours sold, P(ssy) is average tour price, P(ssx) is average price for some other good, A(ssy) is tour advertising, A(ssx) is advertising of some other good, and I is per capita disposible income. The standard errors of the exponents in the preceeding multiplicative demand function are:

b(ss p ss y) = 0.5(ssy)b(ssp ssx) = 0.55(ssy)b(ssA ssy) = 0.8(ssy) b(ssA ssx) = 0.6(ssy) and b(ssI) = 0.8

A. Is tour demand elastic with respect to price

B. Are tours a normal good?

C. Is X a complement good or substitute good?

D. Given your answer to e part C, can you explain why the demand effects of A(ssy) and A(ssx) are both positive?

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Solution Summary

Solve elasticity estimation