Question

10/28/2010 Using three-step method to analyze price and quality of automobiles. method to analyze the effects of each even on the equilibrium quantity (6 pts) Suppose the incomes of the individuals in this market decrease (e) (5 pts) Suppose robots cult car production costs (d) (6 pts) (b) and (c) both occur. nand

Answer 1

b) When the incomes of the individuals in the market decrease, their purchasing power decreases. This leads to a fall in demand for automobiles. Equilibrium quantity falls. This inturn reduces the equilibrium price. As quantity demanded falls, the price of that product will also fall.

c) When robots cut car production costs, the supply of cars will increase. Supply curve shifts outward. With a fall in cost, the price of car will also fall. Thus, equilibrium quantity increases and equilibrium price will fall.

d) When both occur together, equilibrium quantity remains same whereas equilibrium price falls. When income falls, equilibrium quantity and price both falls. When cost of production falls, equilibrium quantity increases whereas equilibrium price falls. The quantity increase and decrease offsets which brings the equilibrium quantity to its old position, that is equilibrium quantity would remain the same. Since, equilibrium price falls twice both by income fall and fall in cost, the equilibrium price falls very highly.