Q2 Z2,(Q2) Z2(Q2) - Institute for Water Resources - U.S. Army

expected as goods in the discriminant part of the analysis
switch classifications. Obviously as T A increases, previous
air goods are going to switch over to sea. In addition,
previous sea goods, misclassified as air goods, will fall
back into the sea classification. The opposite occurs as T A
decreases. As T increases, previous all sea goods will switch
over to air. In addition, some all air goods which had
previously been misclassified into sea will now be properly,
classified back into air. As T decreases, vice versa.
It should be recognized that the above method of
estimating demand functions is biased downward because
total export tonnage of each commodity group is held
constant. There are two reasons why these tonnages could
change in response to changes in air rates. First, a
reduction in these rates should increase the profitability
of selling in foreign markets and cause a diversion of sales
to them from the domestic market. Second, the assumption
that tonnage is constant implies that firms operate subject
to constant cost and a short run constraint on capacity. If
they have rising marginal cost curves, as was assumed in
the theoretical analysis, a reduction in air rates will not
only cause some existing tonnage to shift to air, but will
also bring about some increase in output, and therefore
exports.
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