The Industry Analysts Have Long Recognized That There Is a High

question 9

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:

Automated Assembly Lines

Production systems where equipment and machinery are used to automatically assemble products with minimal human intervention.

Installations

The process of setting up equipment or systems so they are ready for use or operation.

Support Products

Items or services sold to support or complement a company's main product line or services.

Installations

This term refers to the process of setting up equipment, machinery, or software so that it is ready for use.