Question

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

Hi,

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Question:

Answer:

Highly inelastic demand:

Highly inelastic demand is when the buyer’s demand does not change as much as the price changes.

a). Answer:

I will show it below when i will explain the attached relevant graph.

b). Answer:

when the government offers tax incentives (subsidies) to firms developing driverless cars then it increases the supply level and supply curve shifts downward/right.

c). Answer:

if consumer incomes increase at the same time as the tax incentive is put into place then it will work as a booster for consumer demand and consumer demand will increased. Demand curve shifts upward/left.

d). Answer:

I will explain it below when i will explain the attached relevant graph.

Graphical analysis:

For question a:

In this graph "E1" is the equilibrium point because here total quantity demand and total quantity supply is equal. At this equilibrium point the equilibrium Brice is "P1" and equilibrium quantity is "Q1".

For question b:

when the government offers tax incentives (subsidies) to firms developing driverless cars then it will increased the supply and supply curve shifts downward/right from "S0S0" to "S1S1". New equilibrium point is "E2". At this equilibrium point the equilibrium brice is "P2" and Equilibrium quantity is "Q2". Here price decrease and quantity increase.

For question c:

if consumer incomes increase at the same time as the tax incentive is put into place then it will work as a booster for consumer demand and consumer demand will increased. Demand curve will shift upward/left from "D0D0" to "D1D1". New equilibrium point is "E3". At this equilibrium point the equilibrium brice is "P1" and equilibrium quantity is "Q3".

For question d:

if consumer incomes increase at the same time as the tax incentive is put into place then it will work as a booster for consumer demand and consumer demand will increased. Demand curve will shift upward/left from "D0D0" to "D1D1". New equilibrium point is "E3". At this equilibrium point the equilibrium brice is "P1" and equilibrium quantity is "Q3". Here quantity of demand and price level both increase. Quantity level shift from "Q2" to "Q3" and price increase from "P2" to "P1".

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