Answer to Question #249746 in Microeconomics for criter

Question

Entry Sports Utility Vehicles (SUVs) are quickly gaining popularity among Indonesian vehicle buyers, with owners spending an median of 21 months of their household income to purchase a vehicle in this highly aspirational segment, compared with 18 months for the rest of the market, according to the J.D. Power 2016 Indonesia Sales Satisfaction Index (SSI).

As a market analyst for GM, you are to advise the management on the following scenarios, ceteris paribus:

Scenario 1: The selling price of an SUV rises.

Scenario 2: There is a massive discount on the price of a van.

Scenario 3: Consumers expect the price of an SUV will fall next year.

Scenario 4: A breakthrough automation technology help to lower the cost of producing SUVs.

Answer 1

Solution:

Scenario 1: The selling price of an SUV rises – An increase in price can be as a result of either an increase in demand or a decrease in supply or both. So, when the price of SUVs rises, manufacturers will want to sell more, therefore, the production of SUV cars should be increased so that a larger supply can be supplied in the market. The company will be able to increase its revenue and ultimately its profit levels.

Scenario 2: There is a massive discount on the price of a van – Since the van is a substitute product for SUV cars, consumers will tend to substitute SUVs for vans. This will decrease the quantity demanded for SUVs resulting in a decrease in revenues and ultimately low profits generated. Therefore, it will be advisable for the company to also offer discounts on their SUVs or slightly decrease their prices to counter the effect of van discounts. This will maintain or increase the current quantity demanded and hence maintain or increase revenues and profits in SUVs sales.

Scenario 3: Consumers expect the price of an SUV will fall next year – When consumers expect the price of SUVs to fall next year, they will tend to hold on to their funds. The quantity demanded for SUVs will fall as a result and hence a reduction in revenues and profits. The company should focus on moderating prices currently so that they can maintain their customers.

Scenario 4: A breakthrough automation technology help to lower the cost of producing SUVs – This will make the production of SUVs less expensive and affordable to consumers. The company should focus on producing more SUVs at cheaper prices and increase its supply in the market. A such, the company will be able to sell more SUVs and increase its revenues and profits.