6 What effect will each of the following have on the supply

6. What effect will each of the following have on the supply of auto tires? [LO3.2 a. A technological advance in the methods of producing tires. b. A decline in the number of firms in the tire industry. c. An increase in the price of rubber used in the produc- tion of tires will be lower in the future than currently. trailers and earth-hauling rigs (with no change in the a. Supp ing c ernm d. The expectation that the equilibrium price of auto tires e. A decline in the price of the large tires used for semi- exp grap b. Next floor of th cally. price of auto tires). f. The levying of a per-unit tax on each auto tire sold. g. The granting of a subsidy of 50 cents per unit for each auto tire produced.

Solution

a )

A technological advancement would reduce the cost of Tires substantially. Thus, supply of tire shall increase on account of technological advancement.

b)

Decline in number of firms in industry would reduce overall supply of auto tires.

C)

Increase in cost of rubber would enhance cost of producing auto tires. Thus supply will decrease.

d)

Since price is likely to go down in near future. Thus it would affect profit negatively. Hence, firm would try to increase supply at current price. Hence, supply shall increase.

e)

Now it would not be profitable to supply tires to trailers. Such supply of auto tires will increase.

f)

Per unit tax would reduce profitable prices, thus supply will decrease.

g)

subsidy will increase supply of auto tires. Since now it would increase profits.