Build-Right Concrete Products produces specialty cement used in construction of highways.Build-Right is a price-setting firm and estimates the demand for its cement by the State Highway Department using a demand function in the nonlinear form: $Q = a P ^ { b } M ^ { c } P _ { R } ^ { d }$ where Q = yards of cement demanded monthly,P = the price of Build-Right's cement per yard,M = state tax revenues per capita,and $P _ { R }$ = the price of asphalt per yard.The manager at Build-Right transforms the nonlinear relation into a linear relation for estimation.The estimation results are presented below: Given the above,the estimated cross-price elasticity of demand for cement relative to the price of asphalt is
A)0.3
B)0.6
C)1.2
D)3.0
E)none of the above

Question

Build-Right Concrete Products produces specialty cement used in construction of highways.Build-Right is a price-setting firm and estimates the demand for its cement by the State Highway Department using a demand function in the nonlinear form: $Q = a P ^ { b } M ^ { c } P _ { R } ^ { d }$ where Q = yards of cement demanded monthly,P = the price of Build-Right's cement per yard,M = state tax revenues per capita,and $P _ { R }$ = the price of asphalt per yard.The manager at Build-Right transforms the nonlinear relation into a linear relation for estimation.The estimation results are presented below:  Given the above,the estimated cross-price elasticity of demand for cement relative to the price of asphalt is
A)0.3 
B)0.6 
C)1.2 
D)3.0 
E)none of the above

Quizplus · Accepted Answer

The estimated coefficient of 0.6 for the price of asphalt indicates that a 1% increase in the price of asphalt leads to a 0.6% decrease in the demand for Build-Right's cement. This indicates a moderate level of substitution between asphalt and cement in highway construction projects.

Build-Right Concrete Products Produces Specialty Cement Used in Construction of Highways.Build-Right