A company produces a brand of yoghurt for which the following two demand equations have been estimated.

(i) Q = 3.6 - 0.2P_y - 0.6I + 0.7P_i

(2.75) (-2.87) (-2.54) (3.71)

Number of observations = 60, R² = 0.96 (numbers in brackets are t-statistics)

(ii) Q = 2.4 - 0.5P_y + 0.8I - 0.4P_i

(1.15) (2.01) (2.11) (-1.67)

Number of observations = 60, R² = 0.68 (numbers in brackets are t-statistics)

Where Q = number of units of yoghurt demanded,

P_y = price of yoghurt,

I = disposable income, and

P_i = ice cream.

Significance of a coefficient can be determined by t > 2 or t < -2

1. Which equation would you recommend and for what reason? Please explain.
2. Each equation tells you something about the relationship between yoghurt and ice-cream (as far as the two goods being substitutes or complements is concerned). What is the difference between the two relationships described by the two equations? Please give an explanation.
3. What is the difference in the relationship between yoghurt and income between the two equations (as far as the yoghurt being normal or inferior is concerned)? Please give an explanation.