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    Elasticities of demand

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    If income declines by 2.85 percent, how much do I have to cut price in order to maintain existing customers?

    It starts with being given a regression analysis that has the following: coefficient of the intercept is .45, the coefficient of the natural logarithm of price is -2.14, and the natural logarithm of income is .90. Based on the t-stat, p-value etc. I am reasonably confident that the true coefficients are different from zero. Also I come up with the equation of:

    ln customers = .45 -2.14 ln(Price) + .90 ln(income)

    However I am not sure once I get to this point.
    I understand that the coefficients are elasticities but then what?

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    Solution Preview


    It is true that coefficients are elasticities in this case.

    Income elasticity of demand=0.90
    % change in income = -2.85%
    Income elasticity of demand = %change in demand / %change in Income
    Put the values in ...

    Solution Summary

    Solution explains how much price cut is needed to compensate the decrease in customer base due to fall in income. It is explained with the help of elasticity co-efficients.