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The effect of subsidy

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3-6 (Key Questions) What effect will each of the following have on the supply of automobile tires?
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 production of tires.
d. The expectation that the equilibrium price of auto tires will be lower in the future than it is currently.
e. A decline in the price of large tires used for semi-trucks and earth hauling rigs (with no change in the price of auto tires).
f. The levying of a per-unit tax in each auto tire sold.
g. The granting of a 50-cent-per-unit subsidy for each auto tire produced.

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Solution Summary

The effect of subsidy and other concepts are briefly illustrated.

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a. A technological advance in the methods of producing tires.

Answer: Technological advance in the methods of producing tires decreases the cost of production which increases the profit and consequently the incentive to produce. Thus supply increases.

b. A decline in the number of firms in the tire industry.

Answer: Decline in the number of firms reduces supply in the market for automobile tires

c. An ...

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