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The market for Honda's electric cars is currently in equilibrium. However, Tesla has announced that they...

The market for Honda's electric cars is currently in equilibrium. However, Tesla has announced that they will increase the price of all their electric cars by 40%. What happens to the price and quantity of ’Honda's electric cars in the new equilibrium? Draw a graph with the initial equilibrium price and quantity and the new equilibrium price and quantity. Explain your answers.

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Answer #1

Tesla and Honda electric cars are substitute, an increase in the price of the substitute will increase the demand for the other good and shift the demand curve to the right. Here, the old equilibrium was at E1 after the Tesla increase the price it will shift the demand curve to right and the new equilibrium will be at E2.

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