Question

Question 1

1. Draw the market for electric vehicles in initial equilibrium. Be sure to label the axes and the curves/lines. Clearly demonstrate the initial equilibrium price and quantity.
2. Suppose the cost of lithium-ion batteries, an input into the production of electric vehicles, has dropped more steeply than expected. Use the 4-step process to demonstrate the effect of this change in the market for electric vehicles. Explain why you have drawn the change you have.
3. Has there been a change in demand? Explain.
4. Analyze and explain the change in the equilibrium price and quantity. Explain.
5. Explain how any equilibrium price and quantity combination is efficient. Use 1 of the following in your explanation. Be sure to define your terms.
   1. producer and consumer surplus
   2. allocative and productive efficiency
   3. Pareto efficiency to address this ( All solved)

Question 2

1. The demand for driverless cars is highly inelastic. Draw the market for driverless cars in equilibrium. Be sure to label the axes and the curves/lines. Clearly demonstrate the initial equilibrium price and quantity.
2. On this same graph, demonstrate what will happen to either demand or supply when the government offers tax incentives (subsidies) to firms developing driverless cars. Explain why you have drawn the changes you have.
3. On this same graph, demonstrate what will happen if consumer incomes increase at the same time as the tax incentive is put into place.
4. Analyze and explain the joint effect of the tax incentive and the increase in income on the equilibrium price and quantity of driverless cars

Answer 1

The market for electric vehicles in initial equilibrium at E. the initial equilibrium price and quantity are OP and OQ respectively

Suppose the cost of lithium-ion batteries, an input into the production of electric vehicles, has dropped more steeply than expected.

The 4-step process to demonstrate the effect of this change in the market for electric vehicles

Step 1: supply curve shifts to the right to S1 because the decline in cost of lithium ion batteries will decrease the cost of production and so suppliers will be willing to supply more at the same and so supply increases

Step 2: Price of electric vehicles falls due to the increase in supply

Step 3: The is extension in quantity demanded due the the price fall i.e. downward movement from E to E1 on the demand curve

Step 4: Equilibrium quantity demand and supplied at the new lower price P1 will be higher i.e. Q1  

Consumer surplus is the difference between the highest price a consumer is willing to pay and the actual market price of the commodity. Initially the consumer surplus was APE and then it became AP1E1 at the lower price P1

The producer surplus is the difference between the market price and the lowest price a producer would be willing to accept for a commodity. Initially it was PES and then after the increase in supply To S1 it became P1E1Z

The is an increase in consumer and producer surplus explains that there is higher allocative and productive efficiency at the new price and quantity of P1 and Q1

Productive efficiency is when production is at the lowest cost which means the quantity produced should correspond to the lowest point on the average cost curve.

Allocative efficiency is where Marginal utility (MU) is equal to Marginal cost (MC)

Question 2

Initiallly equilibrium is given by the intersection of green curves S and D at E. Correspondingly Eqilibrium price and quantity is at OP and OQ respectively

When the government offers tax incentives (subsidies) to firms developing driverless cars the cost of production will fall and so supply will increase. As a result supply curve will shift from S to S1. New equilibrium will be at U where D and S1 intersect. New price will be OK and quantity OT

If consumer incomes increase at the same time as the tax incentive is put into place- the demand will increase.

To study the joint effect of increase in demand and increase in supply on equilibrium price and quantity, there may be three possible cases. The details are tabulated below

Case	Demand and supply curve	Point of equilibrium	New equilibrium price	New equilibrium quantity
Initial	D and S	E	OP	OQ
Increase in demand = increase in supply	D2 and S1	N	OP ( No change )	OJ (increased)
Increase in demand > increase in supply	D3 and S1	B	OT (increased)	OM (increased)
Increase in demand < increase in supply	D1 and S1	L	OZ (Decreased)	OR (increased)

Thus we can say that in case of simultaneous increase in demand and supply the equilibrium quantity will increase but the change in equilibrium price will demand on the extent of change in demand and supply and which is more.