a)“The impact of high petrol prices on cars with higher cc engine would be minimal…” With reference to paragraph 2, explain this statement diagrammatically, relating the high petrol prices with demand for higher cc engines cars. Changes in demand for higher cc engines car
Quantity (units) Q1 Q0
The figure above shows the changes in demand for the higher cc engines car caused by an increase of petrol prices (complementary goods). D0 is the initial demand curve for higher cc engines car. The price is P0 and the quantity is Q0 (point E0). When the petrol price is increase, the demand curve of higher cc engines car will shift to the left to D1. The price is remains constant at P and the new quantity decrease from Q0 to Q1 (point E1).
b)Petrol remains affordable because it is subsidized by the Government. Using an appropriate diagram, illustrate the effect of subsidy on the domestic petrol price in comparison with the world petrol price. Changes in supply
DD S0 S1 P0 E0 P1 a E1 c b