Question

4. If sellers of a product in a perfectly competitive market change their expectations of future prices and now believe that prices will be higher than their previous expectations, which of the following happens to the equilibrium price of the product today?

a)The price increases.

b)The price decreases.

c)The price will not change.

5. Crude oil prices reached a high of $147.30 (2008 dollars) a barrel in July 2008. The spike in crude oil prices in the late 2000s led to a sharp increase in the price of gasoline. Consumers responded to the increase in gasoline prices by shifting their vehicle purchases towards vehicles with better fuel efficiency (ex. hybrids). On the supply side, firms made significant technological advances that reduced the cost of producing the batteries used in hybrid vehicles. How did these factors affect the prices and quantities of hybrid vehicles sold in the late 2000s/early 2010s?

a)The price of hybrid vehicles increased, but the effect on the quantity is ambiguous.

b)The price of hybrid vehicles decreased, but the effect on the quantity is ambiguous.

c)The quantity of hybrid vehicles increased, but the effect on the price is ambiguous.

d)The quantity of hybrid vehicles decreased, but the effect on the price is ambiguous.

Answer 1

1. OPTION A: The price increases

If they believe that prices will be higher than their previous expectations, they would reduce supply in present and thus supply curve shift leftwards and thus price in present would increase.

2. OPTION C

When the price of gasoline rises, consumers shift to vehicles with better fuel efficiency ie hybrid vehicles so the demand curve shifts to the right. Since there is technological advances that reduces the cost of production of hybrid vehicles, so the supply curve will also shift to the right. This would lead to an increase in the equilibrium quantity but the price would be ambiguous as it would depend on the amount of shifts in the demand and supply curve. If the shift in supply and demand curve would be equal, the price would not change but if there is a difference in the amount of shift in demand and supply curve theequilibrium price would be different.