Question Description

An estimate of the demand function for household furniture produced the following results:

F = 0.0036Y1.08R0.16p-0.48 r2 =0.996 Where F = furniture expenditures per household Y = disposable personal income per household R = value of private residential construction per household P = ratio of the furniture price index to the consumer price index

a. Determine the point price and income elasticity’s for household furniture.

b. What interpretation would you give to the exponent of R? Why do you suppose R was included in the equation as a variable?

c. If you were a supplier to the furniture manufacturer, would you have preferred to see the analysis performed in physical sales units rather than dollars of revenue? How would this change alter the interpretation of the price coefficient, presently estimated as -0.48?