Maria is an industrial engineer at a Toyota plant. Indicate how Maria should change her production plans in response to each change in market conditions.
a. An engine supplier decreases the price it charges Toyota by 50%.
As a result, Toyota’s cost of production will decrease, and Toyota should increase its supply.
b. Workers unionize and demand a 12% across-the-board raise.
As a result, the cost of production will increase and Toyota should decrease its supply.
The Correct Answer and Explanation is:
Certainly! Let’s analyze how Maria, the industrial engineer at Toyota, should adjust production plans based on changes in market conditions.
a. An engine supplier decreases the price it charges Toyota by 50%.
Correct Answer:
As a result, Toyota’s cost of production will decrease, and Toyota should increase its supply.
Explanation:
A major determinant of supply in economics is the cost of production. When the cost of a key input — like an engine — falls significantly, it lowers the overall cost per unit of the final product. Since engines are a core component of vehicles, a 50% reduction in their price represents a substantial cost savings for Toyota.
From a business and economic standpoint, this reduction increases Toyota’s profit margin per vehicle. Therefore, it becomes more financially advantageous to produce more cars. With lower costs and potentially stable or even growing demand, the law of supply suggests that suppliers (in this case, Toyota) will be willing and able to produce and offer more vehicles at the current market price.
Maria should respond by increasing production plans. This may involve scheduling additional shifts, boosting order quantities for other parts, or optimizing assembly lines to handle a higher volume. Increasing supply not only aligns with profit-maximization goals but can also improve Toyota’s market share.
b. Workers unionize and demand a 12% across-the-board raise.
Correct Answer:
As a result, the cost of production will increase, and Toyota should decrease its supply.
Explanation:
Labor costs are a key component of total production costs. A 12% across-the-board wage increase would raise the cost of manufacturing each vehicle. If product prices remain unchanged in the market, Toyota’s profit margins would shrink. Unless Toyota passes this cost increase onto consumers through higher prices (which could reduce demand), it becomes less economically attractive to produce at the same scale.
Higher labor costs decrease the incentive to produce, especially if these costs aren’t offset by productivity gains. Therefore, Maria should plan to decrease production, possibly by reducing shifts, lowering output targets, or even considering automation where feasible to control costs.
This adjustment helps align production with economic efficiency and profitability under new labor cost structures.