Petrol and bicycles are substitutes in consumption. Suppose we increase the petrol tax to R10 per litre. What are the secondary changes that result from the petrol tax as these markets adjust to a new general equilibrium? A. Bicycle price declines, demand for petrol shifts rightward. B. Bicycle price rises, demand for petrol shifts rightward. C. Bicycle price declines, demand for petrol shifts leftward. D. Bicycle price rises, demand for petrol shifts leftward.
Question
Petrol and bicycles are substitutes in consumption. Suppose we increase the petrol tax to R10 per litre. What are the secondary changes that result from the petrol tax as these markets adjust to a new general equilibrium? A. Bicycle price declines, demand for petrol shifts rightward. B. Bicycle price rises, demand for petrol shifts rightward. C. Bicycle price declines, demand for petrol shifts leftward. D. Bicycle price rises, demand for petrol shifts leftward.
Solution
The correct answer is D. Bicycle price rises, demand for petrol shifts leftward.
Here's the step-by-step explanation:
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When the petrol tax is increased to R10 per litre, the price of petrol effectively increases for consumers.
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As petrol and bicycles are substitutes in consumption, consumers will start to look for alternatives to petrol due to the increased price. This means that the demand for bicycles will increase as they are a cheaper and more affordable alternative to petrol.
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As the demand for bicycles increases, the price of bicycles will also increase due to the laws of supply and demand.
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At the same time, the demand for petrol will decrease (shift leftward) because of its higher price. This is because consumers are less willing and able to purchase petrol at the higher price, especially when there are cheaper substitutes available like bicycles.
So, the secondary changes that result from the petrol tax as these markets adjust to a new general equilibrium are that the price of bicycles rises and the demand for petrol shifts leftward.
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