Suppose that the EPA has proposed strict controls on the amount of sulfur that diesel fuel contains. These controls were designed to fully offset the cost of pollution generated by diesel fuel vehicles. The effect of the regulation is estimated to increase the equilibrium price of a gallon of diesel fuel by 10 cents. Suppose that demand for diesel fuel is perfectly inelastic and supply has a positive slope. The effect of the regulation will ________ than if demand were not perfectly inelastic.
A)increase price and quantity by more
B)increase price by less and reduce quantity by more
C)decrease price and quantity by more
D)increase price by more and reduce quantity by less

Question

Quizplus · Accepted Answer

With a vertical demand curve and upward sloping supply curve, a vertical shift upward in cost will increase price by the entire amount of the shift but will not change quantity.

Suppose That the EPA Has Proposed Strict Controls on the Amount