Suppose the demand for sunscreen X has been estimated to be

Suppose the demand for sunscreen (X) has been estimated to be ln Qx = 5 - 1.7 Px + 3 S - 3 + Ay, where S denotes the average hours of sunshine per day and Ay represents the level of advertising for good Y.

a. What would be the impact on demand of a 5 percent increase in the daily amount of sunshine?

b. What would be the impact of a 10 percent reduction in the amount of advertising toward good Y?

c. What might be good Y in this example?

Solution

a) The coefficient of sunshine is (+3) that is the demand of X and average hours of sunshine per day are proportionately related. 1% increase in an average hour of sunshine increases the demand of X by 3%. So 5% increase in the daily amount of sunshine increases the demand of X by 15%.

b) The coefficient of good Yis (+A) that is the demand of X and advertising for good Y are positively correlated. 1% reduction in the advertising of good Y decreases the demand of X by A%. So 10% reduction in the advertising of good Y reduces the demand of X by 10A%

c) As advertising of good Y and demand of good X proportionately related so Y is complementary good of good X.