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Determination of Elasticity of Demand of Cars.

A client has provided data on the price of cars, the price of gasoline, the quantity of new cars sold in USA. Gross Domestic Product per capita is also observed. Using regression technique, use the data to estimate the following log linear market demand equation for new cars.

ln Q(cars) = 5 - 2.4 ln P(cars) - 1.2 ln P(gasoline) = 0.5 ln (GDP per capita)

1. What is the estimated elasticity of demand for new cars with respect to the price of cars?
2. What is the estimated elasticity of demand for new cars with respect to the price of gasoline? What happens to the quantity of new cars sold if the price of gas increases by 5%?
3. What is the estimated elasticity of demand for new cars with respect to GDP per capita?

Solution Preview

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Elasticity of Demand = E = % Change in Quantity demanded / % Change in Price = (dQ/dP)*(P/Q) = del(ln Q) / del(ln P),

where "del" is the partial derivative.

1. Ec = Elasticity of ...

Solution Summary

This solution is a detailed step-by-step explanation of computing the Elasticity of Demand of cars with respect to price of cars, price of gasoline and the GDP.

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