# Question

Suppose that an economist has been able to gather data on the relationship between demand and price for a particular product. After analyzing scatter plots and using economic theory, the economist decides to estimate an equation of the form Q = aPb, where Q is quantity demanded and P is price. An appropriate regression analysis is then performed, and the estimated parameters turn out to be a = 1000 and b = -1.3. Now consider two scenarios:

(1) The price increases from $10 to $12.50;

(2) The price increases from $20 to $25.

a. Do you predict the percentage decrease in demand to be the same in scenario 1 as in scenario 2? Why or why not?

b. What is the predicted percentage decrease in demand in scenario 1? What about scenario 2?

Be as exact as possible.

(1) The price increases from $10 to $12.50;

(2) The price increases from $20 to $25.

a. Do you predict the percentage decrease in demand to be the same in scenario 1 as in scenario 2? Why or why not?

b. What is the predicted percentage decrease in demand in scenario 1? What about scenario 2?

Be as exact as possible.

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