Consider the estimated demand equation of
Where Y is income, z is another good, and P denotes the price.
a. What is the demand equation as a function of Px if the price of good z is $100, the
income in thousands is $25? Calculate the price elasticity for a $1 change in price
at initial price level 0. Calculate the income elasticity for a $1 change in
income at initial income ($25k).
b. What is the change in demand if price rises by $1, holding other factors constant?
What is the percentage change in demand if price rises by $1 from an initial price
of Px=0 given Y=000 and Pz=$100? What is the effect on demand of $1
increase in income, holding other factors constant? What is the percentage change
in demand if income rises by $1 from an initial income of Y=$25000 given
Px=$200 and Pz=$100?
c. Is good z a substitute or a complement? Can we say confidently whether good X
is a normal good or an inferior good?
d. Suppose Dg is a dummy variable for gender (Dg=1 for female) and De is a dummy
variable for employment status (De=1 for employed people) in the following