Question

1. Industry analysts have long recognized the highly complementary relationship between used automobile tires and gasoline. A recent study done by an automobile industry trade group estimated the following supply and demand functions:

   Q_D^T = 84 – 3P^T – 1_PG

   Q_S^T = -6 + 16_P^T

   Q_DG = 94 – 2_P^T – 4_PG

   Q_SG = -8 + 34_PG             

where Q_D^T and Q_S^T refer to quantities of tires demanded and supplied each month measured in sets of four, Q_D^G and Q_S^G refer to quantities of gasoline demanded and supplied each month measured in gallons, _PG is the price of gasoline per gallon, and PT is the price per set of four tires.

1. Calculate the equilibrium price and quantity that will prevail in both the tire and gasoline markets.
   
2. Assume that a recession causes the demand curve for gasoline to shift leftward as follows: Q_DG = 84 – 4_PG – 2.5_PT.
   Calculate the initial impact of this change in demand on the gasoline and tire markets.

Answer 1

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