Question

Consider the market for automobiles in the U.S. Explain how each of the following cases will affect the equilibrium quantity and equilibrium price of automobiles the U.S. auto market.

a. The stock market boomed and automobile is a normal good for a typical U.S. consumer

b. Auto insurance rates increases and wages of auto workers increases as well.

c. More and safer interstate highways are built and Ford exit the U.S. market to serve only European and African markets.

d. Nucor Corporation increase there steel production and OPEC place an embargo on the U.S.

e. The stock market crashes.

Answer 1

a) The stock market boomed means more income for the consumers in the US. This will increase the demand for the Automobiles. An increased demand will shift the demand curve to the right at an increased quantity and higher price.

b) As auto insurance and wages for Auto are complementary goods for Automobiles an increase in the price of these services will decrease the demand for Auto in the US and shift the demand curve to the left at a lower price and lower quantity demanded.

c) More and safer highways will attract more consumer and as Ford has Exit the US market it will reduce the substitutes present in the market. Lack of substitute and better infrastructure will shift the demand curve to the right at a higher quantity and higher price.

d) INcreased steel production will make inputs cheaper for car manufacturing and reduce its price and increase its quantity, on the other hand, an embargo by the OPEC will increase the petroleum price an input for the cars. This will increase the cost of operating a car and reduce the demand and price of cars. To know the exact effect on the price and quantity we have to evaluate the tradeoff between these two conditions.

e) A stock market crash will decrease the income of people in the US they will demand less and this will shift the demand curve to the left at a lower price and lower quantity.