Suppose the government imposes a small carbon tax on automakers. But the price o

Question

Suppose the government imposes a small carbon tax on automakers. But the price of gasoline has doubled due to a Middle East crisis which has reduced oil production. In the market for autos, these changes mean that supply and demand have both changed with the effect on the demand larger than the effect on the supply. The result is that the price of autos will ________ and the number of autos sold will ________. A) rise; perhaps change but we can't say if it increases, decreases, or stays the same B) rise; increase C) rise; decrease D) fall; perhaps change but we can't say if it increases, decreases, or stays the same E) fall; decrease

Explanation / Answer

Answer is B.

Since Carbon tax is imposed on automakers resulting in increase in Manufacturing cost of same and the price of autos will increase.

And the autos sale will decrease due to fact that oil prices are doulbles and its supply is reduced.

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