The Industry Analysts Have Long Recognized That There Is a High

question 44

Essay

The industry analysts have long recognized that there is a high degree of complementarity between automobile tires and gasoline. A recent study done by an automobile industry trade group estimated the following supply and demand functions:
Q_D^T = 5,250,000 - 12,500P^T - 750,000P^G
Q_S^T = -350,000 + 11,750P^T
Q_D^G = 80,500,000 - 30,000,000P^G - 2,500P^T
Q_S^G = 35,000,000 + 15,000,000P^G,
where O_D^T and Q_S^T refer to quantities of tires demand and supplied each month measured in sets of four, Q_D^G and Q_S^G refer to quantities of gasoline demanded and supplied each month measured in gallons, P^G is the price of gasoline per gallon, and P^T is the price per set of four tires.
a. Calculate the equilibrium price and quantity that will prevail in both the tire and gasoline markets. (Hint: Recall that Q_D must equal Q_S in each market.)
b. Assume that a recession causes the demand curve for gasoline to shift leftward as follows:
Q_D^G = 76,000,000 - 30,000,000P^G - 2,500P^T
Calculate the initial impact of this change in demand on the gasoline and tire markets. (You need calculate only one change in P and Q for each market.)
c. Discuss the changes that will occur after the initial round to move each market back to a stable equilibrium. Your answer to part (c) requires no calculations, but graphs would help convey your understanding of the process.

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Definitions:

Break-even Points

The level of sales at which total revenues equal total costs, resulting in no profit and no loss.

Fixed Expenses

Fixed costs are those that stay the same no matter how much is produced or sold, covering expenses like rental fees, employee salaries, and insurance premiums.

Break-even Sales

The amount of revenue from sales at which a business neither makes a profit nor incurs a loss.

Fixed Expenses

Fixed expenses are costs that do not vary with the level of production or sales, providing stability to a company's budget, such as rent or insurance.