Question

An individual has the following demand function for gasoline:

Answer 1

Answer:

Explanation:

From the information given:

$Q^d_{gas} = 15 - 3 P_{gas} + 0.02 I +0.11 P_{BT} -0.008P_{AUTO}$

$Q^d_{gas} = 15 - 3 (30) + 0.02(40000) +0.11 (25) -0.008(22000)$

$Q^d_{gas} = 15 - 90 + 800+2.75 -176$

$Q^d_{gas} = 551.75$

So, Income elasticity = $\dfrac{dQ^d}{dI}*\dfrac{I}{Q^d}$

$= 0.02 *\dfrac{40000}{551.75}$

= 1.45 which is greater than 1

It is positive → i.e. Normal good

The cross elasticity = $\dfrac{dQ^d}{dPBT}*\dfrac{PBT}{Q^d}$

$= 0.11 \times \dfrac{25}{551.75}$

= 0.0049 which is greater than 0

It is positive →  hence they are substituents.