solution

b. If not, what would this relationship approximate?

12. Managers of the Brennan Company used regression analysis to obtain the following

estimate of the demand function for their 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 fi rm. Do you agree? Why or

why not? 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 the estimate of the price elasticity is

unreliable. Do you agree? Why or why not?

c. How can managers obtain a more accurate estimate of the price elasticity

of demand?