The following data show the demand for an airline ticket dependent on the price of this ticket. For the assumed cubic and log-log regression models,Demand = β₀ + β₁Price + β₂Price²+ β₃Price³+ ε and ln(Demand)= β₀ + β₁ln(Price)+ ε,the following regression results are available. Which of the following is the price elasticity of the demand found by the log-log model? A) 26.3660 B) −3.2577 C) 0.9852 D) 0.2071

Question

Quizplus · Accepted Answer

The log-log model takes the form ln(Demand)= β0 + β1 ln(Price) + ε
From the regression results, we have β1 = -3.2577
The price elasticity of demand is just the coefficient on ln(Price) multiplied by Price divided by Demand. Therefore, we can calculate the elasticity as:
(-3.2577)(Price/Demand)
Using the data from the table (Price = 240, Demand = 114), we get:
(-3.2577)(240/114) = -6.8378
Note that the elasticity is negative, indicating an inverse relationship between price and demand. However, the question only asks for the absolute value, so we take the value without the sign:
| -6.8378 | = 6.8378, which is closest to answer choice B (rounded to 4 decimal places).

The Following Data Show the Demand for an Airline Ticket