Question

Question 1: The demand for SUVS has increased. Is the response by manufacturers an increase in quantity supplied? That is, does the increase in the production of SUVS represent a movement along the supply curve? Question 2: Should auto manufacturers produce sedans and SUVS to the point whe re the profit margins of sedans and SUVS are equal? Question 3: What factor could cause an overres ponse in the production of SUVS?

Answer 1

Question 1

When the demand for SUVs increases initially the prices will rise and the quantity demanded increases. There will be a shift in demand curve. As the prices rise the manufacturers will increase the production and the supply insreases . The supply curve will shift to the right

Question 2

The manufacturers should produce sedans and SUVs to the point where the marginal rate of product transformation between both products must be equal to the marginal rate of substitution between sedans and SUVs. The rate at which one good can be transformed into other is known as marginal rate of product transformation.

Question 3

A higher expectation of prices will lead to over production. The manufacturers will produce more if they expect higher prices in the near future .