In the automobile industry, workers have just negotiated a new contract giving workers a large raise. There has also been an increase in the number of licensed drivers who are in the market for a new car. In the market for new automobiles, the effects that these changes will have on the equilibrium price and quantity are
A) price will increase, and quantity will decrease.
B) price will increase, and the effect on quantity is indeterminate.
C) price will decrease, and quantity will increase.
D) price will decrease, and the effect on quantity is indeterminate.

Question

Quizplus · Accepted Answer

The newly negotiated large raise for workers will increase their purchasing power and, thus, increase the demand for new automobiles. Additionally, the increase in licensed drivers in the market for a new car will also increase demand. This increase in demand would lead to an increase in both price and quantity, but we cannot determine the exact effect on quantity without more information about the supply side of the market. Therefore, the effect on quantity is indeterminate, and the answer is B.

In the Automobile Industry, Workers Have Just Negotiated a New