Final answer:
A shortage of steel leads to higher automobile prices because it increases production costs for manufacturers, reducing the supply of automobiles if demand is steady, thus driving up prices. Therefore, the correct option is 1.
Step-by-step explanation:
True, a shortage of steel typically leads to higher automobile prices. When steel, a major input in car production, becomes scarce, the cost of production for automobile manufacturers increases. This is because steel is a key raw material for making cars, and a shortage means manufacturers might have to pay more to source the material, or they might not be able to produce as many cars. According to the law of supply and demand, when an input like steel becomes more expensive or in shorter supply, the supply curve for the finished product—automobiles, in this case—shifts to the left, indicating a decrease in quantity supplied at every price. Consequently, if the demand remains consistent, the reduced supply of automobiles leads to higher prices. This scenario can affect car prices across the market, not just for specific models or brands.
Furthermore, the relationship between input costs and supply can also be illustrated inversely. If the price of steel decreases, car production becomes more cost-effective, which may lead to a greater supply of cars at all prices, as car manufacturers can earn higher profits. For example, if the supply increases and the demand remains the same, this can lead to lower automobile prices.