Question

Given the following demand for European luxury automobiles: Q= 1, 000P-0.93 Pa0.75Pj1.2l1.5
assume that each of the coefficient is statically significant. Comment on the degree of substitutability between European and American luxury cars and European and Japanese luxury cars.Include an explanation of possible reasons for the results in this equation

Answer 1

The European and American cars are perfect substitutes because as the price of the price of American cars increases the demand for European luxury automobiles increases this can be seen from the positive sign of the coefficients.

The results above shows that if the price of American luxury cars increases by 1 percent then the demand for European cars increases by 0.75 percent but for Japanese cars if the price of Japanese luxury automobiles increase by 1 percent then the demand for European automobiles will increase by 1.2 percent.