A joint profit maximizing model of the domestic automobile industry is developed and used to simulate 1985 market outcomes. The industry produces several types of cars and chooses prices and fuel economies for each in a manner that maximizes total profits. Fuel economy mandates and their effects are analyzed. Simulations of both the base (diesel technology) and the restrictive technology (stratified charge engines) cases indicate the industry can be expected to comply with sales-weighted-average fuel economy mandates for new cars of up to 27 to 28 miles per gallon in 1985 without major changes in production, prices and profits. Large uncertainties are associated with the response to higher mandates.
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