Question

From the regression example discussed in class and based on the information below: Regression Statistics Multiple R R Square Adjusted R Square Standard Error Observations 0.925 0.856 0.846 0.059 45 ANOVA P dfss SMS 3 0 .85 0.14 440.99 Significance F 0.00 Regression Residual Total 0.28 0.00 81.46 Intercept PRICE INCOME WEATHER Coefficients 13.040 -0.200 1.500 0.124 Standard Error 0.758 0.063 0.079 0.065 Stat P-value 17.1940 .000 -7.904 0.000 13.162 0.000 1.909 0.063 L ower 95% 11.508 -0.627 0.883 -0.007 Upper 95% 14.571 -0.372 1.204 0.256 Lower 95.0% 11.508 0.627 0.883 -0.007 Upper 95.0% 14.571 -0.372 1.204 0.256 1. Is water price elastic or inelastic? 2. If the Water utility raised water rates by 8%, what would quantity demand go down by?

Answer 1

1. The demand for water is price inelastic. this is because coefficient of price is -0.2 which is less than 1 and thus slope of the curve is less than 1 which makes the demand curve relatively price inelastic.

2. With increase in the water rates by 8 per cent, the percentage decline in quantity demanded = -0.2 * 8 per cent = -1.6 per cent. Thus, with increase in the water rates by 8 per cent, the quantity demanded will fall by 1.6 per cent.