Question

Suppose the demand function for a newly manufactured utility vehicle, SUV-X is given by: Qd =...

Suppose the demand function for a newly manufactured utility vehicle, SUV-X is given by:

Qd = 500 - 12P + 10PY - 5PG + 0.0001M

Where P is the price of SUV-X (in thousands), PY is the average price of similar automobiles (in thousands), PG is the price of gas (per gallon) and M is U.S. household average income.

a. Based on the estimated demand function, is SUV-X a normal good or an inferior good? Why?

b. Based on the estimated demand function, do you consider other SUVs in the market as good (effective) substitutes for the SUV-X? Why?   

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Homework Answers

Answer #1

a.

Given the demand function, the SUV is a normal good.This is because the relationship between demand and price is inverse.We can see the law of demand applies here.As the price of SUV's increases less of it will be demanded.Also, the relationship between quantity demanded and income is positive which means as the average household income increases the quantity demanded of the good will increase.

b.

Yes, the other SUV's are effective substitutes for the current SUV, since an increase in the price of other SUV's will increase the quantity demanded for this SUV.

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