Assume an auto firm's factories are capable of producing both large and small cars and are operating at full capacity.Assume the price of large cars increases due to a shift in consumers' preferences toward large cars and away from smaller cars.What would reasonably be expected to happen to the equilibrium price and quantity of the firm's small cars?

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Quizplus · Accepted Answer

Given the firm's factories are at full capacity and there's a shift in consumer preference towards large cars, the firm would likely allocate more resources to produce more large cars, reducing the production of small cars. This decrease in supply of small cars, with demand shifting away from them, would lead to both a decrease in equilibrium price and quantity.

Assume an Auto Firm's Factories Are Capable of Producing Both