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Answer :
Final answer:
The cost of steel in automobile manufacturing is a variable cost because it varies with the number of vehicles produced. Prices of steel can directly affect the supply of cars and resultantly, the cost to consumers. If demand is inelastic, manufacturers can pass the cost to consumers, if it's elastic, manufacturers bear the cost.
Explanation:
In the context of automobile production, the cost of steel is classified as a variable cost because it changes with the number of units produced. The steel used in the manufacture is a direct material and a crucial component of manufacturing costs. If the price of steel increases, the cost of manufacturing automobiles rises.
Conversely, if the price of steel decreases, producing a car becomes less expensive. Car manufacturers can expect to earn higher profits, resulting in a higher quantity of cars produced. This is seen in the supply shift from So to S2, indicating that at all prices, the quantity supplied increases.
Such cost variations impact the company's decisions about car production volume and price strategy. Carmakers can pass this cost along to the consumers if the demand for these cars is inelastic. However, if the demand for the cars is elastic, then the manufacturer must bear the costs.
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