Question
I'm confused on these questions. Please help.
2a. Other things being equal, what will happen to automakers’ profits if they are able to sell more vehicles using battery packs and thereby scale up battery production?
2b. Why do you suppose that some automakers support the payment of government subsidies to consumers who purchase hybrid and all-electric passage vehicles?
Ramping Up Battery-Pack Production Scale The prices of the least expensive hybrid and all-electric ve- hicles are above $30,000. A significant portion of the per- vehicle cost is the expense of producing battery packs. For the lowest-priced all-electric autos, battery packs account for more than half the expense of producing each vehicle. To try to reduce the average expense of powering hybrid and all-electric vehicles, auto companies are seeking econo- mies of scale in production of battery packs. The firms are ex- panding their productive capabilities in hopes of making larger numbers of battery packs per year. They desire to move down- ward along their long-run average cost curves to the minimum efficient scale of annual production. Toward this end, Nissan is building a battery pack facility in Smyrna, Tennessee, that will be able to produce 200,000 battery packs per year. An Unattainable Minimum Efficient Scale? A fundamental problem stands in the way of achieving economies of scale in production of battery packs: A low scale of production of vehicles using the battery packs. Of the more than 12 million U.S. vehicles produced each year, only about 200,000 are hybrid cars, and fewer than 9,000 per year are all-electric autos. Nor are there many existing vehicles with battery packs requiring replacement. Of the more than 250 million registered passenger vehicles in the United States, only about 2.5 million are hybrid cars. Fewer than 40,000 are all-electric autos. These figures suggest that fewer than 400,000 vehicles per year will require new battery packs. Hence, only two plants of the size of Nissan's Smyrna, Tennessee, plant would be required to produce a sufficient number of auto
Explanation / Answer
2 a) If production increases to maximum level for all the automakers, Then their profits will go higher. But, due to competition within battery makers no one could achieve full production which will make it uneconomical and expensive
2 b) As battery technology is emerging technology which is expensive, Government subsidy is necessary to compete with traditional automobiles that run on gasoline. Subsidies let people buy these vehicles at reasonable cost. Once economies of scale is achieved there will be no need for subsidies.
