Consider the market for automobiles. Suppose that the income level of consumers increases, and at the same time, the price of steel (an input to automobile production) falls. If you have no other information, what can you say about the following?

a. Change in demand of automobiles

b. Change in supply of automobiles

c. With the shift in the demand and supply curve, how would that change the original equilibrium quantity and price?

d. Total costs of a firm producing automobiles

e. Total revenue of a firm producing automobiles

a. Change in demand of automobiles

a. The demand of automobiles will rise because now consumer have more money to spend. This will cause demand curve of automobile to shift right.

b. Change in supply of automobiles

b. The supply of automobiles will rise because the input price i.e., the price of steel falls and it is now beneficial for automobile manufacturer to produce more at lower cost. This will cause supply curve of automobile to shift right.

c. With the shift in the demand and supply curve, how would that change the original equilibrium quantity and price?

c. The equilibrium quantity of automobile will reduce but the equilibrium price may remain same, rise, or fall depending upon how large is the shift in supply curve and demand curve.

d. Total cost of a firm producing automobiles.

d. Total cost will reduce because the price of steel which is an input for automobile declines.

e. Total revenue of the firm producing automobiles.

e. Total revenue will increase because the rise in quantity of automobiles will be higher whether the price will remain same or will change.