1. %Change in Quantity of hybrids divided by % change in in Price of gas = 0.25 and % Change in Quantity of SUV's divided % Change in Price of gas = -0.50
a) Are hybrids and gasoline complements or substitutes? Using the sign of the cross-price elasticity, give an intuitive explanation for your answer.
b) Are sport utility vehicles (SUV's) and gasoline complements or substitutes? Using the sign of the cross price elasticity, give an intuitive explanation for your answer.
c) Given the elasticities in the above question and assuming that higher gasoline taxes would not shift either the SUV supply curve or the hybrid supply curve, explain how higher gasoline taxes would affect the equilibrium price and quantity of SUV's. Also how would higher gasoline taxes affect the equilibrium price and quantity of hybrids? Draw demand and supply curves to illustrate your answers.
2. Given your answer to question 3., how would higher gasoline taxes affect the price of
SUVs relative to hybrids? Explain.
3. Using your answer to question 4., explain why an automaker whose production possibilities frontier (PPF) exhibits constant opportunity cost would stop producing SUVs and completely specialize in the production of hybrids.
4. Using your answer to question 4., explain why an automaker whose production possibilities frontier (PPF) exhibits increasing opportunity cost would produce more hybrids and fewer SUVs, but would not completely specialize.