Question

What effect will each of the following have on the supply of auto 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 now

e. A decline in the price of the 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 on each auto tire sold

g. The granting of a 50-cent-per-unit subsidy for each auto tire produced

Short answer

1. Supply will increase

2. Supply will decrease

3. Supply will decrease

4. Supply will increase

5. Supply will increase

6. Supply will decrease

7. Supply will increase

Step-by-step solution

Effect of a technological advance on the supply of auto tires

An improvement in technology of production methods implies greater production with the same units of inputs. Hence, a technical advancement will improve the production method of tires and will result in a greater supply of auto tires in the market.

Effect of number of suppliers on the supply of auto tires

The greater the number of sellers, the greater will be the supply of a good in the market. Hence, if sellers of auto tires decrease in number, the supply of auto tires will also decline.

Effect of input price on the supply of auto tires

Inputs are used to produce a good. If there is a price rise of one of the inputs, the cost of producing that good will increase, and the profits of the producers will decrease, which will reduce the supply. Rubber is an input used in the production of auto tires. Hence, if the rubber price rises, the cost of producing tires will increase, and the supply of auto tires will decrease.

Effect of sellers’ expectations on the supply of auto tires

If a seller expects that the price of his produced goods will fall in the future, he will try to sell as many units of the good as possible to take advantage of the current higher relative prices. Thus, the supply of tires will be encouraged to increase with the expectation of lower prices in the future.

Effect of the price of other goods on the supply of auto tires

If the price of other types of tires like those used in semi-trucks falls, the seller will be encouraged to shift the production resources to a more profitable option. Since the auto tires have a relatively higher price, the sellers will produce and sell more auto tires.

Effect of taxes and subsidy on the supply of auto tires

A per-unit tax will increase the seller’s costs, thus discouraging the supply of auto tires. A 50-cent-per-unit subsidy reduces the seller’s cost, and therefore, will encourage the supply of auto tires. Thus, taxes and subsidies act as the price of input that influences the production decision of the seller.