# hws05 - Economics 140A Answers to Exercise 5 2(Fall 1990...

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Economics 140A Answers to Exercise 5 2. (Fall 1990 Final Examination) Q t and PM t . We assume that 3 > 0 as movie theater tickets are likely substitutes for video cassette rentals. As a result the slope @Q t @PM t is constant and so the price elasticity @ ln Q t @ ln PM t varies with the magnitude of Q t PM t . The second graph, which corresponds to (2), reveals three possible relations between Q t and PM t . (Note, the ±intercept²now corresponds to PM t = 1 , because ln 1 = 0 .) Under (2) the price elasticity is constant and so the slope varies with the magnitude of PM t Q t . b) Economic theory, rather than a statistical measure such as R 2 , should be to model speci&cation. Suppose the average income of households in neighbor- hood t increased by \$100 per month. Would this have the same a/ect for all neighborhoods regardless of the level of average income in the neighborhood? Undoubtedly not, as wealthy neighborhoods might regard such a change as negli- gible while poorer neighborhoods might increase consumption of services such as cassettes is a/ected by the percentage change in average family income. To the degree to which the price of video cassettes and movie tickets are constant across the neighborhoods in the sample, the distinction between percentage change and absolute change is moot. For these variables either functional form may be appro-

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hws05 - Economics 140A Answers to Exercise 5 2(Fall 1990...

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