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Point Price and Income Elasticities for Household Furniture

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Estimate of the demand function for household furniture
F = 0.0036Y^1.08*R^0.16*P^−0.48
R^2 = 0.996
F=furniture expenditures per household
Y=disposable personal income per household
R=value of private residential construction per household
P=ratio of the furniture price index to the consumer price index

Question A) Determine the point price and income elasticities for household furniture.

Question B) What interpretation would you give to the exponent for R? Why do you suppose R was included in the equation as a variable?

Question C) If you were a supplier to the furniture manufacturer, would you have preferred to see the analysis performed in physical sales units rather than dollars of revenue? How would this change alter the interpretation of the price coefficient, presently estimated as − 0.48?

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Solution Summary

Point price and income elasticity for household furniture are determined. The interpretation to be given for an exponent is determined.

Solution Preview

a. Ed = -.48 (exponent of P)
Ey = 1.08 (exponent of Y)

b. The percentage change in furniture ...

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