Answer to Question #208573 in Economics of Enterprise for Nawo

Question

8.2 Graphically express what effect will each of the following have on the supply of autobmible tires?

I.      A technological advance in the methods of producing tires.

II.      An increase in the prices of rubber used in the production of tires. III.       The levying of aper-unit tax on each auto tire sold.

IV.      The granting of a 50-cent-per-unit subsidy for each auto tire produced. (1*4=4 marks)

Answer 1

i. Improvement in production techniques as a result of advanced technology enables the tire firm to increase her productivity hence increased output and consequently increased supply of tires .As a result there would be a shift in the supply to the right from S to S₁ .

ii. Rubber is a major input in tire production. Therefore an increase in its price will increase the cost of production and consequently low profit margins for the company. This discourages the firm production of tires therefore leading to a reduction in supply. There would be a shift of supply curve to the left, from S to S_1, hence reduction in quantities supplied from Q2 to Q1.

iii) The introduction of the levying of a per-unit tax on each auto tire will affect both the tire firm and the consumers. The seller may choose to bear the tax burden by reducing the profit margin while keeping the prices of goods same or pass it onto the consumers by increasing the price by the percentage of the tax levy; This discourages demand in the long run. This will render the tire production uneconomical (unprofitable) and will likely reduce the tire supply.

iii) Subsidies are financial assistance offered by the government to meet part of the production cost. This will in turn encourage the tire production since the firm will be able to maintain their profit margin while maintaining prices as low as possible to cushion consumers. Granting a per unit subsidy of 50cents will encourage more production of auto-tires since the firm can produce more for less. This will in turn lead to an increase in supply from S to S1.