You are given the following demand for European luxury automobiles:
Q = l,000P-0.93PA0.75Pj1.2I1.6
where P = Price of European luxury cars
PA = Price of American luxury cars
PA = Price of Japanese luxury cars
I = Annual income of car buyers
Assume that each of the coefficients is statistically significant (i.e., that they passed the /-test). On the basis of the information given, answer the following questions:
a. Comment on the degree of substitutability between European and American luxury cars and between European and Japanese luxury cars. Explain some possible reasons for the results in the equation.
b. Comment on the coefficient for the income variable. Is this result what you would expect? Explain.
c. Comment on the coefficient of the European car price variable. Is that what you would expect? Explain.