Equation (1) gives a hypothetical demand curve for hybrid vehicles in the United States during the year 2000, where Q is the quantity demanded and P is the price. Equation (2) gives a hypothetical supply curve for hybrid vehicles in the United States for the same time period, where Q is the quantity supplied and P is the price.
(1) P = -0.01Q + 40,000
(2) P = 0.0025Q + 10,000
a) Draw both the demand and supply curves on the same graph, with price (P) on the vertical axis and quantity (Q) on the horizontal axis, on your own sheet of paper to assist in answering (b) and (c).
b) Find the equilibrium price P* and quantity Q*. Using what you know about what supply and demand curves represent, explain why P* and Q* are the equilibrium price and quantity for the hybrid vehicle market in the United States for 2000.
c) For the following scenarios, describe graphically what will happen (if anything) to the demand and/or supply curves for hybrid vehicles. Justify your response in words. Determine whether the equilibrium price and quantity will be greater or less than the equilibrium price and quantity in part
(b).
i) Toyota finds a cheaper way to manufacture their unique hybrid engine in the Prius.
ii) The U.S. Congress discontinues a tax credit for the purchase of hybrid and alternative fuel vehicles.
iii) The price of gasoline at the pump falls from $3.50/gallon to $2.50/gallon.
iv) Consumer Reports publishes poor crash-test ratings on the Honda Civic hybrid.
v) General Motors makes available the new Chevy Volt, which they claim gets 230 miles per gallon, considerably better than the Prius's 45 miles per gallon.
vi) Mercedes Benz increases the price of the SLR McLaren Roadster from $500,000 to $550,000.