10:35 HW1.docx Economics 3140 Fall 2018 Homework #1 total points) Name(s): (Poin
ID: 1142126 • Letter: 1
Question
10:35 HW1.docx Economics 3140 Fall 2018 Homework #1 total points) Name(s): (Point value of each questions in parenthesis; 15 . Many factors influence societys decision whether or not to purchase domestic automobiles. Assume the following demand function represents the demand for domestic cars in some fictional society where Qd is the number of domestic cars demanded, Pp is the price of a domestic car in hundreds of dollars, PM is the price of an imported car in hundreds of dollars, Po is the average annual amount of money spent on gas in hundreds of dollars, Y is consumer income in dollars, Pop will measure market size (number of buyers), and Ad is the amount of money spent on advertising measured in thousands of dollars. The following demand curve for society is found. (4 points) Q- (-0.25 P)+(-0.75 PM)+(-0.85 Po(15 )+ 0.5* Pop)+ (2* Ad) a Analysis of the model led to the discovery of two significant errors with the exogenous variables in the model. Which two variables have the errors and what is the problem with each? hint it may help to write out a sentence for each variable describing the effect cach exogenous variable has on the model like we did for our demand equation in class, there should be two very glaring errors that jump out at you. b Assume that after correcting for errors and estimating the value of each exogenous variable the equation could be reduced to Qd 0.25P+2800. Create a demand schedule with 4 prices for this demand curve. (no graph needed) 2 Many factors also influence the production decisions of auto manufacturers in societv, Research indicates that the Open With PrintExplanation / Answer
a. Pd is the price of a domestic car in hundreds of dollars. As price increases, Q should fall.
PM is the price of an imported car in hundreds of dollars. It should not affect the domestic consumption of cars.
PG is money spent on gas. Gas and Cars are complementary goods. When price of gas increases, quantity consumed of gas decreases and quantity consumed of cars also decreaes.
Y is consumer's income in dollars. Q increases as Y increases.
Pop is market size. As market size increases, Q increases.
Ad is money spent on advertising in thousands of dollars. Q increases as Ad increases.
The errors are:
1. Pm will not be an explanatory variable. Because we are estimating domestic consumption.
2.The coefficient of Y is too high. Y is in dollars. The above coefficient says that with a one dollar increase in Y, Q increases by 15. Q will increase with Y, but its magnitude will not be so high.
b.
P( in hundreds of dollars) Qd 100 2775 200 2750 300 2725 400 2700Related Questions
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