One of the characteristics of U.S. policy on mobile sources emission control is

Question

One of the characteristics of U.S. policy on mobile sources emission control is the "bias against new vehicles", which means the new vehicle models normally are under more stringent regulation. The following graph shows the outcomes in the used cars market and the new vehicle models market. Which of the following statement is correct? (1,000) S(1,000) Market for Usedcars 20 Marketfor New vehicle models 1.5 a (thousands) 0.7 0.8 Q (thousands) 15 20 1) The market price of new vehicle models will decrease from $21,000 to $20,000. 2) The market price of used cars will decrease from $2,000 to $1,500 3) The sales of new vehicle models will increase from 15,000 to 20,000 4) The sales of used cars will increase from 700 to 800 5) None of the other answers are correct.

Explanation / Answer

Option (4).

As new vehicles are put under stringent regulation, total cost of selling new cars increases, therefore firms lower production and output, and market supply decreases, shifting supply curve toward life as shown in the panel for new vehicles. As a result price for new cars will increase from $20,000 to $21,000. Since used cars are substitutes, higher price of new cars will increase the demand for used cars, shifting the demand curve for used cars toward right, increasing price of used cars from $1,500 to $2,000 and increasing sales of used cars from 700 to 800 units.

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