Question

You have estimated the following model for demand of grape juice using one
hundred observations.
Qg= 150.83–0.75Pg+ 0.37Po+0.65Y.
(0.04) (0.23) (0.02) (0.52)R-square=0.78
Where, Qg=quantity demanded of grape juicebbottles.
Pg=price of grape juice per unit.
Po=Priceoforangejuice.
Y=Income.
Standard errors are in parenthesis.
a)Do income and price of orange juice have any significant effect on the demand
for grapejuice?
v)Calculate cross-price elasticity when the mean values of price and quantity
demanded are respectively, 25 and 68.

Answer 1

a) Yes, income and price of orange juice have a significant effect on the demand for grape juice. This is evidenced by the fact that the coefficients for both variables are statistically significant (i.e. the standard errors are smaller than the coefficients).

b) The cross-price elasticity can be calculated as follows:
Cross-price elasticity = -0.75 * (25/68) = -0.44