On January 1, 2018, the government introduced a 5 percent VAT, based on what you studied and if all other things being equal: a. What should be the effect of VAT on quantity demanded and quantity supplied on all car brands in the UAE? b. Show the effect on the car market using a labelled graph.

Case Study: The UAE Automobile Industry The U.A.E. automobile industry faced tough challenges in 2016, and the trend is likely to continue due to lack of economic clarity in the near future, overstocking of cars by dealers, and abundant availability of certified pre-owned vehicles. That said, the U.A.E. will continue to be one of the most robust automotive markets in the GCC thanks to factors such as low fuel costs, low import tariffs, high per capita disposable income, and a favorable tax regime. Also, attractive insurance and finance options make it relatively easier for consumers to buy cars in the U.A.E. The outlook is particularly favourable for the sale of luxury cars, electric and hybrid vehicles, and motorcycles. And, due to the likely increase in migration from neighbouring countries with inadequate public transport, buying cars should remain a priority for new residents. However, the tariff applied to cars is 5 percent customs duties (on the value of the vehicle plus 1 percent insurance plus the cost of the shipment). Also, on January 1, 2018, the government introduced a 5 percent VAT which also affected the prices of vehicles sold in the country. As a result of the introduction of VAT on cars, it has increased the charge on car loans, fuel cost, parking fees, servicing, and repairs. Also, VAT is applied to car insurance, which increased the cost of the budget. This is in addition to new regulations for the car insurance industry that were rolled out at the start of 2017. They included increasing the maximum liability for third-party damage from AED 250,000 to AED 2 million. This stipulation, along with other changes, increased the cost of car insurance policies across board. 190 percent of UAE residents are not sure of the brand they will buy before they start browsing, so there is a massive ability to influence someone's choice," said Marie de Ducla, Head of the automotive industry at Google in Mena. BMW, the German multinational company which currently produces luxury automobiles, motorcycles, and aircraft engines, also has its largest automobile showroom in the world based in Abu Dhabi, UAE. With 20,018 units sold, BMW saw a 5 percent increase in its U.A.E. sales during 2016 with 6.3 percent market share. Lexus sold 10,402 units, featuring eighth among the U.A.E. top-10 best-selling automotive brands. Other luxury brands that performed well in 2016 included Jaguar (+15 percent) and Maserati (+14 percent). In 2017, Japanese manufacturers Toyota, Nissan, and Mitsubishi remained the leading sellers of passenger cars in the U.A.E. Toyota retained its position as the market leader with 29.7 percent share, followed by Nissan at 15.2 percent, and Mitsubishi at 9.4 percent. The top three brands comprised over 54.3 percent of total passenger car sales in the U.A.E. in 2016. Recently, BMW has been rumoured to be expanding its brand, designing more sophisticated and exotic cars and increasing the prices of its vehicles by 7.5 percent. Given U.A.E.'s (both nationals and expatriates) high disposable income levels and an interest in classic, modified and luxury vehicles, there is a great demand for specialty performance and appearance products. The Ministry of Energy and Industry has announced fuel prices for October. The per-liter prices are Super 98 at AED 2.61 (up from AED 2.59 in September) and Special 95 at AED 2.50 (up from AED 2.48 last month). Diesel price has been fixed at AED 2.76 per litre (from AED 2.64 in September)