Question

Suppose that the Canadian government as part of efforts to protect the environment, plan to give an $8,000 refundable tax credits to individuals purchasing Electric Vehicles (EV's). At the same time, the price of Lithium Batteries, a major component of EV's falls by 50%. The combined effect of the above is that, the equilibrium price of EV's _____ and the equilibrium quantity produced _____.

A)

probably changes, but in an ambiguous direction; probably changes, but in an ambiguous direction

B)

decreases; decreases

C)

increases; increases

D)

probably changes, but in an ambiguous direction; increases

Nicholas Maduro is the president of Venezuela. Venezuela is a major producer of oil products, which remain a critical component of Venezuela's economy. Suppose that President Maduro wanted to increase his popularity with the citizens of Venezuela and enacted a government policy to reduce the price of gasoline sold at state-owned gas stations to 50% of the previous price. This policy is called a:

A)

laissez-faire policy

B)

quota

C)

price ceiling

D)

price floor

Answer 1

1. Option D

Due to refundable tax credits, the demand for Electric Vehicles will increase. As a result the demand curve will shift to towards right. Also due to decrease in the price of lithium batteries, the cost of production of electric vehicles will reduce as lithium batteries is an important component in the production of electric vehicles. Due to this the supply of electric vehicles will increase. As a result the demand and supply curve will intersect at new Equilibrium point. At new Equilibrium point, the Equilbrium Quantity of vehicles will definitely increase. This is because consumers will demand more vehicles and produ ers will supply more vehicles. The impact on Equilibrium Price is uncertain. It may increase, decrease or remain same depending upon the maginitude of change in supply and demand. When increase in demand is more than supply then Equilbrium Price of vehicles will increase. When Supply is more than demand then Equilbrium Price of vehicles will reduce. When both demand and supply increases equally then Equilbrium Price will remain same.

2. Option C

Price Ceiling is a legal maximum price that one pays for some good or service. A government imposes price ceilings in order to keep the price of some necessary good or service affordable. When prices are set below the Equilbrium Price, it results in shortage. Due to shortage the Quantity Demanded is more than Quantity supplied. Price Ceilings are effective an binding only when the price is set below the Equilbrium Price. Maximum prices can reduce the price of gasoline to make it more affordable. However due to shortage customers may have to stand in queues to purchase gasoline.