Assume that the Japanese car maker, Toyota has successfully established an assembling plant of cars at...

Assume that the Japanese car maker, Toyota has successfully established an assembling plant of cars at Okahandja and its annual production is unknown. Assume that the demand function for the automobile industry is:

Q = β_1 P + β_2 PI + β_3 I + β_4 Pop + β_5 i + β_6 A

(1) where Q is the quantity of cars demanded (dependent variable) and is a linear function of all the independent variables; P is the average price of new domestic cars (in N$); PI is the average price for new import cars (in N$); I is disposable income per household (in N$); Pop is population (in millions);

(i) is average interest rate on car loans (in percent); and A is industry advertising expenditures (in N$ millions). The terms β_1, β_2, …, β_3 are parameters of the demand function. Explain the determinants of quantity of cars demanded as stated in equation 1 and clarify the expected relationship between each parameter and quantity of cars demanded. Motivate the rationale for each of the demand variables in equation 1.

(I) Assume that the parameters of the demand function (equation 1) are known with certainty, as shown in the following equation.

Q = –450P + 155PI + 155I + 5,500Pop – 2,500,000i + 100A ……..(2)

Using equation 2, explain the effects of the changes in the independent variables on the dependent variable.

Expert Solution

Rahul Sunny answered 1 year ago

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