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In year 2010 automobile industry produced 5 million cars which were driven for 200,00 miles on an average. Assuming the gasoline consumption is 30 miles per gallon estimate the energy consumption in terms of gallons. By the year 2020 with the technology development, production of hybrid cars has increased. Assuming same number of cars were produced by the automobile industry and driven for 200,000 miles with gasoline consumption of 40 miles per gallon estimate the increase in energy efficiency for the automobile industry.

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Bunny Greenfelder
Bunny GreenfelderLv2
1 Nov 2018

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The gasoline demand is derived from the demand for transportation services. For this specific example, think of the demand for transportation services as the number of the miles people want to drive each month. You can safely assume that the number of miles demanded each month is directly related to how much it costs to drive an additional mile ( the marginal cost of gasoline per mile).

To figure out how much it costs to drive an extra mile, we need to know the fuel efficiency (miles per gallon, or mpg). of the driver's car, along with the prices of gasoline. Suppose the price of gasoline is $6 per gallon and Carrie drives a truck that gets 10 miles per gallon. For Carrie, the marginal cost of gasoline per mile is $6 per gallon or $0.60 per mile.

Let's explore how changes in fuel efficiency affect the driving habits of two drivers, Rory, and Lucille.

Assume that Rory and Lucille each drive identical cars that get 24 miles per gallon. When gas cost $3.60 per gallon, they each drive 1,560 miles per month. When gasoline is $3.60 per gallon, the extra cost of driving one additional mile ( the marginal cost per mile) is _______? ( which answer fills the blank $0.51, $0.25, $0.15, $0.36). They each buy ______ ( which answer fills the blank 50, 60, 65, 433) gallons of gasoline per month, and at $3.60 per gallon, they each spend _________ ( which answer fills the blank $5616.00, $180.00, $234.00, $175.00). per month on gasoline.

Assume each driver buys the same new, more fuel-efficient car that gets 30 mpg. When gasoline is $3.60 per gallon, the marginal cost per mile for the new car is ______ ( which answer fills in the blank $0.36, $0.12, $0.22, $0.56).

You can use the price elasticity of demand to see how a change in the marginal cost per mile of driving will impact Rory's and Lucille's driving habits. The price elasticity of demand is the absolute value of the percentage change in the quantity divided by the percentage change in price.

In this case, Q1 is the number of miles driven each month before the switch to a more fuel-efficient car and Q2 is the number of miles driven each month after the switch. P1 is the marginal cost per mile of the car that gets 24 miles per gallon and P2 is the marginal cost per mile of the car that gets 30 miles per gallon.

In the old car, Rory drove 1,560 miles per month. In the new car, Rory drives 2,040 miles per month. Rory buys ________ ( which answer fills in the blank 37.3, 375, 57.8, 68) gallons of gasoline per month and spends ________ ( which answer fills in the blank $231.25, $240.00, $244.80, $ 168.00). With the new car, Rory buys _______ ( which answer fills in the blank the same amount of, more, or less) gasoline each month. Rory price elasticity of demand for miles per month is _______ ( which answer fills in the blank 0.85, 1.20, 1.50, 0.62).

In the old car, Lucille drove 1,560 miles per month. In the new car, Lucille drives 1,760 miles per month. Lucille buys __________ ( which answer fills in the blank 45, 286, 58.67, 62.5) gallons of gasoline per month and spends ___________( which answer fills in the blank $250.00, $157.50, $211.20, $375.00). With the new car, Lucille buys ________ ( which answer fills in the blank, the same amount of, more, less) gasoline each month. Lucille's price elasticity of demand for miles per month is _________ ( which answer fills in the blank, 1.16, 0.54, 0.85, 0.42).

Dalum Papir A/S is almost halfway through its second century as a Danish paper manufacturer. Years ago, the firm was one of many paper companies, but now it constitutes one- half of Denmark's two-firm paper industry. The company utilizes highly energy-efficient techniques to manufacture glossy paper from recycled materials for magazines. Dalum Papir has had little choice but to conserve energy. Government taxation has boosted energy prices more than 45 percent above the U.S. level. Also, like other Danish firms, Dalum Papir must meet government-mandated standards for energy conservation.

Ever since the 1970s, when a worldwide spike in oil prices set off a prolonged recession, Denmark's government has sought to shield the nation's economy from future aggregate supply shocks induced by jumps in energy prices. Toward that end, it has enacted high energy taxes and tough regulatory conservation measures. A consequence is that Danish oil consumption per $1 million of real GDP has declined by more than 30 percent - to 120 tons o oil per $1 million of real GDP - over the last 30 years. Indeed, Denmark's total oil consumption has remained unchanged since the late 1970s. Thus, consistent with the government's intent, whenever oil prices suddenly shoot up, Denmark's economy tends to experience smaller aggregate supply shocks than it did in years past.

As the experience of Dalum Papir and the dwindling Danish paper, industry illustrates, however, the government's quest for aggregate supply stability has come at the cost of growth in the production of goods and services. Since the late 1970s, Denmark's real GDP has doubled, whereas U.S. real GDP has quadrupled. During that period, total U.S. oil consumption has increased by more than 40 percent, yet because U.S. real GDP has increased fourfold, U.S. oil consumption per $1 million of real GDP has fallen by more than 25 percent - almost as much as the percentage decline in Danish oil consumption per $1 million in real GDP. Thus, although the Danish economy is less susceptible than the U.S. economy to aggregate supply shocks, Denmark's aggregate supply is growing at about half the pace at which the U.S. aggregate supply is expanding.

1. Why do unexpected variations in energy prices generate aggregate supply shocks, which sudden changes in total planned expenditures do not?

2. Other things being equal, why might we expect the Danish price level to be more stable over time than the U.S. price level?

Mexico's automobile industry is booming. Bolstered by $19 billion in new investment from foreign carmakers, including Nissan, Honda, Volkswagen, and Mazda, vehicle production doubled between 2009 and 2014 to an estimated 3.2 million vehicles. This investment surge has transformed Mexico into the eighth-largest automaker in the world, and it's not over yet. In 2014 and 2015, Toyota, Mercedes-Benz, Hyundai-Kia, BMW, and Volkswagen all outlined plans to build new state-of-the-art factories in Mexico. Audi is also constructing a $1.3 billion factory that is slated for producing luxury sport-utility vehicles. The Audi factory is scheduled to open in 2016. Taken together, these new factories represent another $20 billion in investment that will push Mexico past Brazil and South Korea to become the sixth-largest car producer in the world by 2020 with an annual output of 4.7 million vehicles (for comparison, the U.S. industry makes some 11.5 million autos a year). The initial stimulus for the dramatic growth of the Mexican auto industry was the establishment of the North American Free Trade Agreement (NAFTA) in 1994. Prior to NAFTA, Mexico's auto industry was small and protected from foreign competition by high tariff barriers. Car prices in Mexico were two to three times higher than in the United States. Not only were cars in Mexico more expensive, exporting or importing cars and parts was also very tough. Shipments got delayed at the border and were difficult to move around because of poor infrastructure, which is a major problem in an industry in which tight logistics is critical. NAFTA removed most tariff and nontariff barriers to trade between Mexico, the United States, and Canada. This initially led to a flood of low-priced auto imports into Mexico from the United States, but it also gave auto manufacturers based in Mexico duty-free access to the large U.S. market next door. With labor costs in Mexico just a fraction of those in the United States, auto manufacturers now had to consider Mexico when planning new plants to serve the North American market. Mexico's shift to free trade didn't stop with NAFTA. Mexico spent much of the 2000s hammering out free trade deals with over 40 other countries, including the 28 states of the European Union, Japan, and Brazil. These deals give auto factories based in Mexico duty-free access to markets that contain 60 percent of the world's economic output, and they have helped transform Mexico into the fourth-largest auto exporter in the world. Eighty percent of the cars now produced in Mexico are exported to other countries, two-thirds of them to the United States. This unprecedented network of regional trade agreements has given Mexico an important edge when it comes to attracting new investment. For example, when BMW ships cars to Europe from its 20-year-old plant in South Carolina, it is hit with a 10 percent import duty. For a $50,000 car, that amounts to $5,000, which is a much bigger factor than differences in labor costs. A factory in Mexico can supply both the U.S. and the EU markets with duty-free automobiles. This was a major factor behind BMWs 2014 decision to build a new factory in central Mexico rather than the United States, far outweighing the $500 a car labor cost advantage that Mexico currently enjoys over the United States. The new BMW factory will supply the U.S. and EU markets, as well as Latin America. Indeed, because of differences in trade barriers, a car exported from the United States to Brazil costs 55 percent more than one exported from Mexico. As Mexico's auto industry has grown, auto-part suppliers have also followed manufacturers to Mexico. The large auto parts supplier Delphi, for example, has 30 factories in Mexico and generates revenues of $3 billion in the country. Employment at Delphi's facilities doubled to 24,000 between 2007 and 2014. Infrastructure has also improved dramatically, and customs clearance at the border is now quick and efficient. All of this bodes well for the future of the Mexican auto industry. However, not everyone is happy with what has happened. Some argue that growth in Mexico has come at the expense of factories in the United States, which has had a negative impact on employment growth in the U.S. auto industry. When BMW decided to build a factory in central Mexico, for example, it meant that it would not be expanding its South Carolina plant. The South Carolina plant will continue to operate, and no plants have been closed as a result of the growth of production in Mexico, but it is true that new plants are increasingly being located south of the border. Sources: Joann Muller, America's Car Capital Will Soon Be... Mexico,€ Forbes, July 20, 2014; Dudley Althaus and William Boston, Trade Pacts Give Mexico an Edge,” The Wall Street Journal, March 18, 2015; Sonari Glinton, How NAFTA Drove the Auto Industry South, National Public Radio, December 8, 2013; Serena Maria Daniels, Twenty Years after NAFTA, a Mini Detroit Rises in Mexico,” Bridge, September 25, 2014. CASE DISCUSSION QUESTIONS

1. What was the initial impact of NAFTA on the U.S. and Mexican automobile markets? Who benefited most from this?

2. How did the impact of NAFTA start to change location decisions by automobile manufacturers over the years? How did this start to impact automobile production in Mexico and the United States?

3. Mexico has been very proactive in signing regional free trade deals in addition to NAFTA. How has this strategy impacted automobile consumers and producers in Mexico? How has it impacted automobile consumers and producers in the United States?

4. What lessons can United States policymakers draw from the growing success of the Mexican automobile industry that can be applied to future free trade deals, such as the deal currently being negotiated between the United States and the European Union?

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