Question

The switch to the use of ethanol in gasoline is driven primarily by its relatively lower price. Assuming a competitive market, what effect would this change have on the equilibrium price and output for gasoline? Price rises, output falls. Price falls, output rises. Price rises, output rises. Price falls, output falls.

Answer 1

Answer:

Price falls, output rises

Explanation:

We know that the ethanol is used as an input in the production of gasoline. So, if the price of ethanol is lower then this will reduce the cost of production of gasoline. If the cost of production of ethanol is lower then this will give an incentive to the producers of gasoline to produce more and supply more.

This will shift the supply curve of gasoline rightwards, as a result there is a fall in the equilibrium price level and increase in the equilibrium quantity of gasoline.