Answer to Question #71436 in Economics for Huda

Question

Qx = 235 - 3Px + 40A - 20U + 8Pw

The number of detailing jobs he gets per month (Qx) depends on the price he charges per job (Px), his monthly advertising expenditures (A) measured in Rs. 1,000s, the regional percentage unemployment rate (U), and the average price charged by local car wash businesses (Pw) for a standard wash and wax.


(a)Is automobile detailing a normal good or an inferior good? How can you tell?

(b) Is a wash and wax at the local car wash a complement or a substitute for automobile detailing? How can you tell?

Answer 1

Qx = 235 - 3Px + 40A - 20U + 8Pw
The number of detailing jobs he gets per month (Qx) depends on the price he charges per job (Px), his monthly advertising expenditures (A) measured in Rs. 1,000s, the regional percentage unemployment rate (U), and the average price charged by local car wash businesses (Pw) for a standard wash and wax.
(a) Automobile detailing is a normal good if income elasticity of demand is positive and it is an inferior good if income elasticity of demand is negative. We can't evaluate if automobile detailing is a normal good or an inferior good, because we have no data about any changes in income.
(b) Cross-price elasticity of demand measures the responsiveness of the quantity demanded for a good to a change in the price of another good. A negative cross elasticity denotes two products that are complements, while a positive cross elasticity denotes two substitute products. In our case if Pw increases, then Qx increases too, so cross-price elasticity is positive, so a wash and wax at the local car wash is a substitute for automobile detailing.