Question

In 2011, the US trucking industry faced the following economic conditions

1. The US economy was improving rapidly, recovering from a prolonged economic recession during which trucking had shrunk its capacity by 14% .

2. The government instituted new regulations imposing more frequent equipment inspections and restricting operators’ daily driving hours.

3. Year over year, diesel fuel prices were up by 9%.

For each of these, show the effect on the equilibrium price and quantity in the US trucking industry.

Answer 1

1) Given that during recession trucking was operating with excess capacity. Now with recession is easing out, there will be an increase in demand for transportation and so demand for trucking will shift righwards. This would increase the equilibrium price and quantity in the US trucking industry

2) New regulations are causing more frequent inspections and restricting operators’ daily driving hours which will discourage trucking. Hence, the supply will decrease and supply curve will shift to the left. This would increase the equilibrium price and decrease the quantity in the US trucking industry

3) Trucks use diesel and when diesel is expensive, input price is increased and this decreases the supply. Thus, supply curve will shift to the left. This would increase the equilibrium price and decrease the quantity in the US trucking industry