17 You are the CEO of a multinational manufacturer of brande

17. You are the CEO of a multinational manufacturer of branded consumer foods sold in retail stores. Your Research Director, a PhD Economist, reports to you the following demand curve for one of your cereal brands (2 points): Ln(Q) = 6 + 0.8 In(P)-1.5 In(M) Where: Q Quantity demanded P = Price M = Income Do you trust the Research Director has correctly estimated a demand curve? Why or why nofuidald nt hacd a.

Solution

17.a) I consider cereal brand is a normal good. Price and quantity demand is inversely related that is if the price is increased, quantity demand will be decreased. Here if the price is increased ln(P) will be decreased so ln(Q) will be decreased. For an example, If price was $12 and income was 1 so ln(M) is 0. Now demand is ln(Q)=6+0.8(ln(12))=7.99. Q=10^7.99=97723722

Now if price is $5, ln(Q)=6+0.8(ln(5))=7.29. Q=10^7.29=19498446. So demand is decreased with the decrease in price. Therefore the inverse relationship between price and quantity is not established.

For normal good income and quantity demand is directly related. Here if M is increased ln(M) will be increased. As the coefficient is -1.5 so the demand will be decreased. For example if M=$30 and P=$1 so ln(P)=0, ln(Q)=6-1.5ln(30)=0.898. Q=10^0.898=7.9. Now M=$50, ln(Q)=6-1.5ln(50)=0.132. Q=10^0.132=1.355. So demand is decreased with increasing income. The direct relation between income and demand cannot be established by this equation.

So the research director has not correctly estimated the demand curve.