1. Given the elasticities in question 2. and assuming that higher gasoline taxes would not shift either the SUV supply curve or the hybrid supply curve,
a. explain how higher gasoline taxes would affect the equilibrium price and quantity of SUVs.
b. explain how higher gasoline taxes would affect the equilibrium price and quantity hybrids. Use supply and demand curves to illustrate your answers.
4. Given your answer to question 3., how would higher gasoline taxes affect the price of SUVs relative to hybrids? Explain.
5. Using your answer to question 4., explain why an automaker whose production possibilities frontier (PPF) exhibits constant opportunity cost would stop producing SUVs and completely specialize in the production of hybrids.
6. Using your answer to question 4., explain why an automaker whose production possibilities frontier (PPF) exhibits increasing opportunity cost would produce more hybrids and fewer SUVs, but would not completely specialize.