Micro Economics 1. Other things being equal, what will happen to automaker\'s pr

Question

Micro Economics

1. Other things being equal, what will happen to automaker's profits if they are able to sell more vehicles using battery packs and thereby scale up battery production?

2. Why do you suppose that some automakers support the payment of government subsidies to consumers who purchase hybrid and all-electric passenger vehicles?

3. If input prices had increased as firms entered the lithium industry in response to rising demand, what would have been the shape of the long-run supply curve?

4. If the market demand for lithium were to decrease during the 2020s. what would happen to the market clearing price of lithium in the long run?

Explanation / Answer

1.) Automakers profits will go up if the demand for battery powered vehicles increase. This current market is small, so selling electric cars has plenty of room for increased profit.

2.) Automakers support government subsidies to purchasers of their cars because it encourages more people to buy their product. Instead of the automaker having to sell their car at a more acceptable price, the government steps in and subsidizes the purchase. This means that the purchaser will receive a check or a tax refund from the government, if they purchase that car.

3.) If input prices increased after firms entered the the lithium battery industry, then the price of the lithium batteries would need to go higher. This means that if the production of the battery goes up, then the sale price of the batter must also go up so that the firm earns a profit.

4.) If demand for lithium decreased during the 2020's, then the price of lithium would decrease due to a lack of customer desire for that product.

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