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IAI Actuarial Core Principles · Business Economics · Consumer demand and behaviour

A rise in the price of petrol increases demand for electric two-wheelers in India, and a fall in battery costs simultaneously increases their supply. Which outcome for the electric two-wheeler market is certain?

Equilibrium quantity certainly rises. Both demand and supply shift right, and each raises quantity traded, whereas the price change is ambiguous because it depends on which shift is larger.

  1. AEquilibrium price rises
  2. BEquilibrium price falls
  3. CEquilibrium quantity risesCorrect
  4. DEquilibrium quantity falls
  5. Equilibrium quantity is unchanged

Explanation

Petrol and electric two-wheelers are substitutes, so demand shifts right. Cheaper batteries shift supply right. Both shifts raise quantity, while the price effect depends on relative sizes and is indeterminate.

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