Question

1. Suppose the demand function for automobile industry is :
Q = - 500 P + 210 Px + 200 I + 20.000 POP + 1.000.000 i +600 A
where
Q : the number of new domestic automobiles demanded
P : the average price of new domestic cars (in $),
Px : the average price of luxury cars,
I : disposable income per household (in $),
POP : population
i : average interest rate on car loans (in %),
A : industry advertising expenditures (in million $).
Based on the demand function, automobiles are inferior goods. True or False? Why? What else can you say about new domestic cars and their relationship with luxury cars?

Answer 1

Answer
Based on the demand function, automobiles are inferior goods. True or False?

False

Why?
The coefficient of income (I) is positive means the relationship between demand and income is positive and it is positive for a normal good, it is negative for inferior good
=========

What else can you say about new domestic cars and their relationship with luxury cars?

Luxury car price 'Px' has a positive coefficient means the goods are substitutes as an increase in the price of one increases the demand for others.
So the relationship is called substitute goods.