A safety report is released that contends that sport utility vehicles are prone to roll over during crashes. At the same time, the price of steel (used to produce motor vehicles), increases. What is the net effect of these two incidents on the market for sport utility vehicles?

Question

Quizplus · Accepted Answer

The safety report would likely decrease demand (due to concerns over rollovers), while the increase in steel prices would increase production costs, decreasing supply. Both effects lead to a decrease in equilibrium quantity. The price effect is indeterminate because the decrease in demand puts downward pressure on price, while the decrease in supply puts upward pressure on it.

A Safety Report Is Released That Contends That Sport Utility