What effect will each of the following have on the supply of auto tires? a. A te

Question

What effect will each of the following have on the supply of auto tires?
a. A technological advance in the methods of producing tires.
b. A decline in the number of firms in the tire industry.
c. An increase in the price of rubber used in the production of tires.
d. The expectation that the equilibrium price of auto tires will be lower in the future than currently.
e. A decline in the price of the large tires used for semitrucks and earth hauling rigs (with no change in the price of auto tires)
f.The levying of a per unit tax on each auto tire sold.
g. The granting of a 50 cent per unit subsidy for each auto tire produced.

Explanation / Answer

a)

An advancement in the technology for production of tires will allow producers to produce more tires at the same cost.

So, supply of tires will increase.

b)

A decline in the number of firms in tire industry will reduce the supply of tires, as number of producers will fall.

c)

An increase in the price of rubber (input to tire production) will make producing tires expensive, thereby making producers produce less of them.

So, supply of tires will fall.

d)

an expectation of auto prices to fall in future will induce producers to produce and supply more of tires in the present, so as to not sell them at lower prices tomorrow and incur reduced profits.

So, supply of tires will increase

e)

No effect on supply of auto tires

f)

Levy of tax per tire will make producing and selling tires expensive for producers. As a result, they will start decreasing their supply of tires

g)

Subsidy per auto tire will incentivize producers to produce more of tires, so as to make more of subsidy money.

This will increase the supply of tires in the market.

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