Assume that the market for rental cars for business purposes is perfectly competitive, with the demand for this capital input given by

K = 1,500 – 25v

and the supply given by

K = 75v – 500

Where K represents the number of cars rented by firms and v is the rental rate per day.

a. What will be the equilibrium levels for v and K in this market?

b. Suppose that following an oil embargo gas prices rise so dramatically that now business firms must take account of gas prices in their car rental decisions. Their demand for rental cars is now given by

K = 1,700 – 25v – 300 g

Where g is the per-gallon price of gasoline. What will be the equilibrium levels for v and K if g = $2? If g = $3?

c. Graph your results.

d. Since the oil embargo brought about decreased demand for rental cars, what might be the implication for other capital input markets as a result? For example, employees may still need transportation, so how might the demand for mass transit be affected? Since businesspeople also rent cars to attend meetings, what might happen in the market for telephone equipment as employees drive less and use the telephone more? Can you think of any other factor input markets that might be affected?