MC Qu. 101 If the price of gasoline increases significantly...

If the price of gasoline increases significantly, then we’d expect the price for hybrid and electric cars to

BlackTom Analysis

Question

MC Qu. 101 If the price of gasoline increases significantly...

If the price of gasoline increases significantly, then we’d expect the price for hybrid and electric cars to

BlackTom Analysis

BlackTom AI · Accepted Answer

When the price of gasoline rises significantly, drivers look for cheaper alternatives to fuel costs, making hybrid and electric cars more attractive as substitutes. 
Option 1: 'increase, and the quantity to decrease.' This is incorrect because an increase in demand for hybrids and electric cars would typically raise both equilibrium price and quantity, not lower the quantity. A price rise alone would not cause a decrease in quantity demanded overall for the market; the quantity demanded moves along with the demand curve to a higher price and higher quantity when supply can meet the new demand. 
Option 2: 'increase, and the quantity increase.' This matches the standard supply-and-demand framework: higher demand shifts the demand curve right, leading to a higher equilibrium price and a higher equilibrium quantity if the market can adjust supply. The substitution effect from pricier gasoline makes buyers willing to purchase more hybrids/electric cars, increasing both P and Q in equilibrium. 
Option 3: 'decrease, and the quantity to increase.' Here, the price is said to fall while quantity rises. This scenario would occur if supply increased dramatically or demand shifted in an unusual way, but not from a gasoline price shock driving demand for hybrids upward; a gasoline price spike does not typically push equilibrium price down. 
Option 4: 'decrease, and the quantity to decrease.' This would imply both price and quantity fall, which contradicts the expected outcome from a positive demand shift toward hybrid/electric cars due to higher gasoline costs. The usual effect is at least a higher price and higher quantity when demand increases. 
In summary, the gasoline price spike makes hybrids/electric cars more attractive, shifting demand to the right and leading to a higher equilibrium price and a higher equilibrium quantity in the market, which aligns with option 2.

MC Qu. 101 If the price of gasoline increases significantly... If the price of gasoline increases significantly, then we’d expect the price for hybrid and electric cars to BlackTom Analysis

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