Question

1) Consider the market for new cars. a. Identify four factors that may infl uence the demand for new cars (eit her movements along the demand curve or shifts of the demand curve). (2pts) b. Identify four factors that may infl uence the supply of new cars. (2pts) c. If the cost of steel goes up, how will supply or demand (if either) be affected? What wil happen to the equilibrium price and quantity? (2pts) d. If the cost of parking goes up, how will supply or demand (if eit her) be affected? What will happen to the equilibrium price and quantity? (2pts) e. Suppose the U.S. Environmental Protection Agency announces it will require new light trucks and sport utility vehicles (SUVs) to install pollution control devices that will increase their cost. How wl the supply and demand curves (if either) for cars be affected? (Assume cars and SUVs are considered different goods.) What will happen to the ei price and quantity of cars? (2pts) f. Consider the difference between the short run of a few days or weeks and the long run of a few months or years. Suppose the price of gasoline goes up. How will the supply and demand curves be affected in the short run? What will happen to the equilibrium price and quantity of cars? (2pts) g. In the long run, how would your answer to part f. change? (2pts)

****IMPORTANT**** PLEASE ONLY PARTS F AND G.

Answer 1

In short run an increase in prices of gasoline will cause aggregate demand to fall and hence cars will be substituted with local transportation for commute. Hence the quantity of cars produced shall be less due to fall in demand and will be rolled out at reduced prices to incentivize an increase in consumption .

However in long run, the situation shall normalise and supply of cars shall be more than before and demand too will increase in long run due to stability in gasoline prices. This will thus cause prices of cars to stabilise and be more than before because of boost in demand.