Reference no: EM131654735

1. An economist estimated market demand for bottled water purchased in supermarkets in Chicago as:

Q_W = 400 - 200P_W + 70P_T + 0.01I,

Where Q_W = gallons of bottled water purchased per week, P_W = price of bottled water purchased in supermarkets ($/gallon), P_T = price of bottled iced tea purchased in supermarkets ($/gallon), and I = income per year. For simplicity, assume all bottles are the same size. Average values of the righthand variables in this equation in Chicago at the time were P_W = $1.50, P_T = $2.50, and I = $30,000.

a. Using this regression, calculate the cross-price elasticity of demand for bottled water with respect to iced tea (at the average values given above).

b. Given the above regression equation, could you estimate the cross-elasticity of demand for bottled iced tea with respect to the price of bottled water? Why or why not?

c. Suggest two variables you would add to this demand estimation model if you were re-estimating it. What sign would you expect on these two new variables (positive or negative), and why?