Suppose that the American government imposes a binding quota on the number of German-made cars allowed into the United States. Assuming that German-made cars and American-made cars are substitutes in consumption, we would expect the price of German cars to _____ and the price of American-made cars to _____.
A)increase; increase
B)increase; decrease
C)decrease; increase
D)decrease; decrease

Question

Quizplus · Accepted Answer

When a binding quota is imposed on German-made cars, it limits the supply of these cars in the U.S. market. This reduced supply, assuming demand remains constant or increases, will likely lead to an increase in the price of German-made cars. Since German-made cars and American-made cars are substitutes, an increase in the price of German-made cars would lead to an increased demand for American-made cars. This increased demand for American-made cars, assuming the supply doesn't change significantly, would lead to an increase in their price as well.

Suppose That the American Government Imposes a Binding Quota on the Number