Question

Please answer b and c only

CHAPTER 5 Demand Estimation 215 Qr = 12 1.86-95OPr + 004Y-221 Pz Year 1986 1987 1988 1989 1990 ら(S) 14 Year 1991 1992 1993 1994 199 P, (S) 18 Year 1996 1997 1998 1999 2000 (-5.12) (2.18) (-0.68) F-167.33 15 15 18 21 24 16 17 R2 = 0.9633 D-w = 2.38 20 (a) Explain why you think we have chosen to include the price of commodity Z in the above regression. (b) Evaluate the above regression results. (c) What type of commodity is Z? Can you be sure? 17 ($) 20 Year 2001 2002 2003 2004 2005 P, (S) 23 19 21

Answer 1

B: Regression result show that price of products x and z are negatively related with the quantity of product x. This means as price of products x and z increase, the demand for good x falls. If price of product x increases by 1 unit (may be $) then demand of good x falls by 9.50 units. Now from the results it is clear that income has a poitive relation with Qx. Thus as the income of the individual increases by 1 unit(may be by $1 lets say), Qx increases by 0.04 units. Hence proving that Qx is a normal good.

C. Commodity Z is complement good of commodity X as an increase in the price of both the commodity decreases the demand for good X, as they both are negatively related with Qx.