7. One would expect that the demand for automobiles in Indonesia over the next 1

Question

7. One would expect that the demand for automobiles in Indonesia over the next 15 years will be influenced, not just by the price of automobiles and household incomes, but also by demographic change and the rise of aspiration for a middle-class life-style. How might you include these factors in a specific formula for the demand function for automobiles? Assume a linear demand function where the dependent variable, x, is the number of automobiles per family. Write downa possible formula and explain the variables you would include and why you include them in the way that you did. Lecture "Welfare evaluation - consumer's surplus"

Explanation / Answer

Here, demand is being influenced by the many factors such as price, income of consumers, demography and middle class.

Rise in young population and middle class would indeed give rise to the demand.

Qd = 100 -2P +3Y +0.5M

Here, Y stands for young population.

MC stands for Middle class.

Coefficients of P, Y and M have been drawn arbitrarily.

Y and M would positively contribute towards the rise in demand for automobiles. Rise in Y and M will contribute coefficients time rise in demand for automobile.

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