7 Consider the US market for automobiles A small pollution t

7) Consider the U.S. market for automobiles. A small pollution tax has been levied on the sales of new cars. But the price of gasoline has doubled due to a Middle East crisis which has reduced oil production. In the market for autos, these changes mean that supply and demand have both changed with the effect on the demand larger than the effect on the supply. The probable result is that the price of autos will be autos sold will and the number of A) higher, increased B) higher; perhaps change but we can\'t say if it increases, decreases, or stays the same C) increased; increased D) lower; decreased E) lower; perhaps change but we can\'t say if it increases, decreases, or stays the same

Solution

Increase in gasoline price will affect the demand side of automobile because now consumer will demand less automobile by considering gasoline as complimentary good and when price of complimentary good increases then price of good increases. Imposition of tax by govt on the sale of automobile will affect the supply side of automobile and suppliers will reduce the production as their cost is rising.

Hence we can say price of auto will be higher for sure but for the quantity sold we cant say anything whether it will increase, decrease or stays same