Final answer:
U.S. automakers raised prices in the mid-1980s, despite a bad economy, to signal quality in a market with imperfect information and due to the pressures of inflation and advancements in technology.
Step-by-step explanation:
During the mid-1980s, U.S. automakers faced an economy in turmoil, with high fuel prices and changing consumer preferences affecting car sales. Despite common sense suggesting that lower prices might boost sales during economic downturns, automakers chose to increase the prices of their cars. This counterintuitive strategy can be analyzed using Cost-Volume-Profit (CVP) analysis and the concept of imperfect information in the market.
One reason for raising prices, even when demand is low, relates to the perception of quality. A higher price can signal better quality to consumers, especially in markets with imperfect information. People may infer that a lower price indicates a lower quality product, whereas a higher price might imply superior quality, leading to potentially increased sales despite the higher prices.
Further analysis reveals the effects of inflation over time. The increase in general price levels across the economy, not just the automotive industry, meant that price hikes were partly a response to diminished purchasing power. The vehicles of the 1980s, equipped with advanced features like computerized engine controls, were also more advanced and fuel-efficient than cars of the 1970s. Therefore, part of the increased cost was due to improved technology and fuel efficiency, possibly justifying higher prices.