Question

Suppose the U.S. Environmental Protection Agency announces it will require new light trucks and sport utility vehicles (SUVs) to install pollution control devices that will increase their cost. How will the supply and demand curves (if either) for cars be effected? (Assume cars and SUVs are considered different goods.) What will happen to the equilibrium price and quantity of cars?

Answer 1

Since now the cars are more costly (due to the pollution control equipment to be installed), its price of manufacturing increases and thus supply of the car decreases. So, supply curve shifts toward left. Demand curve remains unchanged because it is affected due to consumers’ income or by taste and preferences, etc. The change in the price of cars affect only the quantity demanded and not the demand curve because it causes movements along the demand curve and not shift the demand curve.

Effect of Decrease in Supply and no change in Demand S1. Y D Price E1.. P1 S1 Q1 Q Quantity DEMANDED AND SUPPLIED

Hence equilibrium price increases and equilibrium quantity decreases.