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: where Q = yards of cement demanded monthly,P = the price of Build-Right's cement per yard,M = state tax revenues per capita,and = 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:  where Q = yards of cement demanded monthly,P = the price of Build-Right's cement per yard,M = state tax revenues per capita,and  = 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 cross-price elasticity of demand for cement relative to the price of asphalt is the coefficient of the variable P2 (the price of asphalt) in the regression equation, which is -0.60. Since cross-price elasticity is the percentage change in the quantity demanded of cement resulting from a one percent change in the price of asphalt, the estimated cross-price elasticity is -0.60, which means that a one percent increase in the price of asphalt would result in a 0.6 percent decrease in the quantity demanded of Build-Right's cement.

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