Question
The pandemic has affected many sectors of the economy through supply and demand shocks (things that shift supply and demand). For example, automakers have experienced
The pandemic has affected many sectors of the economy through supply and demand shocks (things that shift supply and demand). For example, automakers have experienced positive demand shocks because many consumers now prefer private modes of transportation to public transportation. And they have also experienced negative supply shocks primarily because of an increase in their inputs' prices (e.g., workers, computer chips, raw materials, etc.).
a- Show the impact of supply and demand shocks on the equilibrium of the market for cars [5p].
b- Suppose that we know that the price of cars has, on average, increased by 5000$ since the pandemic started. Can this information help us to compare the magnitude of the supply and demand shocks (i.e., whether the supply or the demand shocks are bigger or more dominant)? Why or why not? You can refer to the graph you drew in part (a), or you can draw new diagrams if you feel like it [10p].
c- Suppose that we know that the total revenue of automakers has increased since the pandemic started. Can this information help us to compare the magnitude of the supply and demand shocks? Why or why not? What additional information do we need in order to reach a more conclusive answer? Draw as many new diagrams as you feel you need in answering this part of the question. Be as precise as possible [20p]
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