Question

2) A news released proved the inefficiency of hybrid vehicles. However, 2 months ago the number of dealers offering various hybrid models nearly tripled. How will this affect the price of hybrid vehicles? Use economic terms and well labelled diagrams in your answers.

Answer 1

Ans. Due to the news article indicating inefficiency of hybrid vehicles, the demand for hybrid vehicles will fall shifting the demand curve leftwards from D to D' and increase in number of dealers of hybrid cars will increase supply of electric cars shifting the supply curve rightwards from S to S'. This will create a situation of excess supply of hybrid cars in the market decreasing their prices from P to P'. Although change in equilibrium quantity is ambiguous because that will depend on whether change in supply is more, less or equal to change in demand which will increase, decrease or keep unchanged, respectively the equilibrium quantity of hybrid cars in the market.

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