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Explaining Demand Equation for Potato

The market demand for potatoes is estimated as follows

Log Q = 1.5 - .33log P + 0.3log I + 200log P'

Q = pounds per year, P = price of potatoes in cents per pound, I = Average income of consumers, and P' = price of

rice per pound. All the parameters are statistically significant at the 1 percent level.

Provide a complete interpretation of the estimation results. (Hint: Use the equation to provide as much information as possible about the demand for potatoes).

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Solution:

We see that demand for potato chips is dependent on its price, Income level of consumers and price of rice per pound.

Own price elasticity of demand =(dQ/dP)*(P/Q)

Log Q = 1.5 - .33log P + 0.3log I + 200log P'
on differentiating with respect to P we get
(1/Q)*dQ/dP =-0.33/P
dQ/dP = -0.33*Q/P

Own price elasticity of demand = (dQ/dP)*(P/Q)
=-(0.33Q/P)(P/Q)
=-0.33

-ve sign ...

Solution Summary

The solution describes results of estimating the market demand for potato with the help of elasticities.

$2.19