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Indicate whether the following statement is TRUE or FALSE and explain your answer: An increase in...

Indicate whether the following statement is TRUE or FALSE and explain your answer: An increase in the price of electric cars will lead, other things equal, to a decrease in the equilibrium price of cars using petrol.

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Answer #1

This statement is false.

Electric cars and car using petrol are substitutes. So when the price of electric cars increases, then people will shift their demand to the car using petrol from an electric car. This lead to a right shift in the demand curve of the petrol car.

The producer will start producing electricity car as its price increase and decrease the supply of car using petrol. This lead to a leftward shift in the car using petrol. Now the new equilibrium point will be E1. So we can see that the price of the car using petrol is increased.

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