While consumers will face higher prices, Chrysler will earn bigger profits. Looking to the next few years, the Chairman of Chrysler predicted that the overcapacity in the industry would continue but not worsen. He expects demand to fall when the economy slows down, but not by as much as in the past. Another development is that Chrysler and Daimler-Benz are hoping to merge in the autumn. Details are to be announced later.
Questions Draw a supply and demand diagram of the market for automobiles.
Show the equilibrium price and quantity. The news story describes a situation in which Chrysler and other companies cannot sell their vehicles at sticker price. Show the price on the diagram and label the surplus. Explain why Chrysler and other producers are offering various financial incentives. Refer what this does to the price of vehicles, the quantity demanded, the quantity supplied, and the surplus.