Answer to Question #302982 in Economics of Enterprise for Masum

Question

What effect will each of the following have on the equilibrium price and quantity of

motor car? Answer with graph.

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

ii. A decline in the number of firms in the motor car industry.

iii. An increase in the prices of rubber used in the production of tires.

iv. The expectation from consumer point of view that the price of motor car will be

lower in the future than currently.

v. The granting of a 50-cent-per-unit subsidy for each motor car produced.

Answer 1

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

Tyres are a complimentary good and technological advance in production will produce more tires and prices will fall. The demand will increase for motor cars and tyres as well as supply as shown:

Equilibrium price and quantity will shift from point b to point d. Price decreases as quantity demanded increases.

(II) A decline in the number of firms in the motor car industry.

This means that the production of motor cars will reduce similarly to the supply and consequently, prices will go up and demand will decrease. Equilibrium price will increase and quantity will decrease as shown:

(III) An increase in the prices of rubber used in the production of tires.

This will lead to a decrease in quantity of rubber as well as motor car produced and prices will go up. Equilibrium price will increase and quantity demanded fall caused by shortage in supply as shown:

(IV) The expectation from consumer point of view that the price of motor car will be lower in the future than currently.

If consumer expect price to fall in the future, demand will decrease. Supply will be in excess and will shift equilibrium price and quantity, that is, price will fall and quantity demanded increase as shown:

(V) The granting of a 50-cent-per-unit subsidy for each motor car produced.

This will reduce cost of production hence more units produced and prices will fall while demand will increase. Equilibrium price falls and quantity demanded increases as shown: