Monday, October 15, 2007

Session 7

Things to remember

B(hat)=

COV(Xi,Yi)
-----------
VAR(Xi)

∑(Xi-X)(Yi- Y )
= -----------------
∑(Xi-X)2

Elasticity =

------------P(BAR)
B(HAT)*-----------
------------Q(BAR)

R2 = Coefficient of determination = ESS/TSS= ∑(Y(HAT)-Y(BAR))2 /∑(Yi-Y(BAR))2

Always explain R2 in EXAM

Qx=4PX0.3.I0.7.Py-0.8.T0.2

1. X and Y are substitutes
2. X and Y are complements
3. X is a luxury good
4. X is a inferior good

Here cross price elasticity = -0.8, Since it is negative it means if Price of Y decreases, quantity demanded of X increases. Hence they are complements.

In the multiplicative model, elasticity is constant