Suppose you wish to estimate the elasticity between solar power systems sales and the tax on solar power systems using state-level data on solar system sales and solar system taxes.You could estimate this effect by regressing the
A)total number of solar systems sold on solar system tax rates.
B)total number of solar systems sold on the log of solar system tax rates.
C)log of the total number of solar systems sold on the log of solar system tax rates.
D)log of the total number of solar systems sold on the solar system tax rate.

Question

Quizplus · Accepted Answer

The best choice is to regress the log of the total number of solar systems sold on the log of solar system tax rates. This is because elasticity measures the percentage change in the quantity demanded of a good in response to a percentage change in the price of that good. Taking the log of both variables will provide estimates of the percentage change in solar system sales for a given percentage change in the tax rate, which is what we need to estimate the elasticity. The choice of regressing the total number of solar systems sold on the log of solar system tax rates is also reasonable, but it would not provide a direct estimate of the elasticity.

Suppose You Wish to Estimate the Elasticity Between Solar Power