Question

2. New cars are normal goods, and are sold in competitive markets.

a. Suppose the price of gasoline falls.

i. What happens to supply and/or demand for new cars as a result? Explain briefly.

ii. Using your answer to (i), show using a fully labeled graph the change in price and output in the market for new cars.

b. Still focused on the new car market, identify changes to supply and/or demand resulting from: (i) the price of steel falls, (ii) public transportation becomes cheaper and more comfortable, (iii) auto-workers accept lower wages, and (iv) automobile insurance becomes more expensive?

i. change in S/D:          Very brief explanation:

ii. change in S/D:         Very brief explanation:

iii. change in S/D:        Very brief explanation:

iv. change in S/D:        Very brief explanation:

c. Using your answers to (b), show using a fully labeled graph the change in price and output in the market for new cars.

Answer 1

a. Suppose the price of gasoline falls.

i. What happens to supply and/or demand for new cars as a result?

Ans:- Gasoline and cars are complimentary goods, which means both are consumed in conjunction. In case of complementary goods, fall in price of one good increases the demand of other good. So when price of gasoline falls demand for new cars will increase and demand curve shifts towards right side

ii. Using your answer to (i), show using a fully labeled graph the change in price and output in the market for new cars.

b. Still focused on the new car market, identify changes to supply and/or demand resulting from:

(i) the price of steel falls:-

Ans:- When price of steel falls, then the supply of new cars will increase and supply curve shifts towards the right side. The reason is when price of steel falls then the cost of production also falls as the form receives goods at low rates and hence supply increases.

• Graph:-

(ii) public transportation becomes cheaper and more comfortable :-

Ans:- Public transports can be a good substitutes for cars. So when price of substitutes falls then demand for our good falls as consumers can go for the other alternate which they receive at low rates. When public transport becomes cheaper then demand of new cars will fall and demand curve shifts backwards towards left side.

• Graph:-

(iii) auto-workers accept lower wages:-

Ans:- When autoworker accept lower wages, then the cost of production of cars will reduce and as a result of this the supply will increase and supply curve shift forwards towards right side.

• Graph:-

(iv) automobile insurance becomes more expensive?

Ans:- Automobile insurance and new cars are complemtary goods, when price of automobile insurance increases, it will result in fall in demand for new cars and demand curve will shift backward. Complementary goods are negatively related.

• Graph:-

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