Assume that the Japanese car maker, Toyota has successfully established an assembling plant of cars at Okahandja and its annual production is unknown.Assume that the demand function for the automobile industry is:

Q = + + + + + .............(1)

where Q is the quantity of cars demanded (dependent variable) and is a linear function of all the independent variables; P is the average price of new domestic cars (in N$); PI is the average price for new import cars (in N$); I is disposable income per household (in N$); Pop is population (in millions); i is average interest rate on car loans (in percent); and A is industry advertising expenditures (in N$ millions).

a)The terms , , ..., are parameters of the demand function. Explain the determinants of quantity of cars demanded as stated in equation 1 and clarify the expected relationship between each parameter and quantity of cars demanded. Motivate the rationale for each of the demand variables in equation 1.(10)

b)Assume that the parameters of the demand function (equation 1) are known with certainty, as shown in the following equation.