Y5

Question 2 The policymakers attempt to forecast its car market in Malaysia. The car market is perfectly competitive. Gasoline cars and electric cars are substitutes. (a) The production cost of batteries for electric cars has been reduced dramatically. and the price of electric cars falls. Explain the effect of the fall in the price of electric cars on the equilibrium price and quantity in the market for gasoline cars. Illustrate your analysis with a diagram. [3 marks] (b) Let's consider the market of electric cars. Demand and supply for electric cars are given Q d = 100 P, Q5 = 80 + 2P. where Q d indicates quantity demanded Q5 quantity supplied. and P price. The policymakers know that due to insufcient infrastructure. some people are reluctant to replace their cars with electric cars. Thus. the policymakers decide to give a $30 subsidy on the purchase of electric cars. Explain the effect of the per tuiit subsidy on the electric car market. Explain the effect of the subsidy on consumer surplus. producer surplus and total surplus (Hint: Calculate consumer surplus. producer surplus based on the equations. and show the changes after a subsidy is issued). Illustrate your analysis with a diagram. [5 marks]