Managers of the Brennan Company used regression analysis to obtain the following estimate of the demand function for its product:
log Q = 2 - 1.2 log P + 1.5 log I
where Q is quantity demanded, P is price, and I is consumers' disposable income.
a. Brennan's president is considering a 5% price reduction. He argues that these results indicate that such action will result in a 6% increase in the number of units sold by the firm. Do you agree? Why or why not?
b. The firm's treasurer calculates that the probability that the t statistic of log P is as large (in absolute value) as it is, given that log P has no real effect on log Q, is about 0.5. He says that the estimate of the price elasticity is unreliable. Do you agree? Why or why not?
c. How can the managers obtain a more accurate estimate of the price elasticity of demand?