Question

Consider the market for the Toyota Prius, which is a hybrid, fuel efficient vehicle. For each of the following scenarios, use the supply and demand model to explain how you would expect the market equilibrium price and quantity traded to change for the Prius market. You should explain which side of the market (supply, demand, or possibly both) is likely to be affected, and indicate on a graph any shifts in the curves that might occur.

1. (a) The price of gasoline and diesel fuels increase.

2. (b) Toyota’s R & D division develops a new automated assembly unit that allows all of its factory workers to assemble more components in any given day.

3. (c) The Federal government introduces a tax rebate for the use of public transportation (e.g. taxpayers can purchase a prepaid commuter card which can be claimed on their tax returns).

Answer 1

a.)

If the price of gasoline and diesel increases the and Toyota Prius being a hybrid car which means it has a feature of running on electricity. As the price fo gas and diesel increases, the demand for Prius cars increases, this means that the demand curve will shift to the right and the equilibrium quantity and price will increase as the position of equilibrium shifts rightward from E1 to E2.

b.)

if Toyota’s R & D division develops a new automated assembly unit that allows all of its factory workers to assemble more components in any given day then the productive potential of the factory increases, this would cause the supply to increase and shift to the right from S0 to S1. This rightward shift causes the equilibrium quantity to increase and price to decrease. The intersection for equilibrium shifts rightward from E1 to E2.

c.)

The Federal government introduces a tax rebate for the use of public transportation (e.g. taxpayers can purchase a prepaid commuter card which can be claimed on their tax returns). This would cause the overall demand for cars to go down as people will not opt for public transport due to the incentives. This will cause the demand for Prius' to fall and the demand curve to shift to the left from D0 to D1. This will cause the point of equilibrium to shift to the right as the equilibrium quantity and price fall.