Problem Set 2 1. Assuming the following demand for European luxury automobiles: Where P = price of European luxury cars PA = price of American luxury cars PJ = price of Japanese luxury cars Y = annual income of

Problem Set 2

1. Assuming the following demand for European luxury automobiles:

Where P = price of European luxury cars

            P_A = price of American luxury cars

            P_J = price of Japanese luxury cars

            Y = annual income of car buyers

a. Comment on the degree of substitutability between European and American and between European and Japanese luxury cars. Explain some possible reasons for the results in the equation.

b. Comment on the coefficient for income.