Tax Cut and Battery Costs
The question
The market for electric bicycles in the country of Kelmara is initially in equilibrium, and electric bicycles are a normal good. This year Kelmara cuts its personal income tax, raising households' disposable income, and over the same months an unrelated advance in cell chemistry lowers the price of the battery packs that go into every bicycle. Assume no other change in producers' costs. Show the effect of these two changes on the market for electric bicycles in Kelmara. Show the effect on the Supply and Demand graph.
Drag a curve, or use the arrow buttons. Want the free-play version with every control? Open this graph in the sandbox.
Tax Cut and Battery Costs: the worked answer
On the Supply and Demand graph, Demand shifts right and Supply shifts right.
Why Demand shifts right and Supply shifts right
Electric bicycles are a normal good, so higher disposable income raises the amount buyers are willing and able to purchase at every price, and the demand curve shifts right. Battery packs are an input in production, so their lower price cuts the per-unit cost of building each bicycle, and the supply curve shifts right as well. Both shifts push the quantity traded in the same direction, so equilibrium quantity definitely increases. The two shifts push price in opposite directions: the increase in demand on its own would raise the price, while the increase in supply on its own would lower it. The change in equilibrium price is therefore indeterminate. It rises if the demand shift is larger, falls if the supply shift is larger, and stays the same if the two shifts are equal in size.
What happens to the equilibrium
The equilibrium quantity of electric bicycles definitely increases, while the change in equilibrium price is indeterminate because it depends on whether the demand shift or the supply shift is larger.
The mistake students make on this one
The dominant error is answering as though both outcomes are determinate, usually "quantity rises and price falls," because cheaper batteries feel like the bigger story. Nothing in the stem says which shift is larger, so any price prediction is unsupported; a rubric awards the point only for stating that quantity increases and that the price change cannot be determined without knowing the relative magnitudes.
On exam day
Take a two-shift question one outcome variable at a time: the variable both shifts push the same way is the one you commit to, and for the other write the word "indeterminate" followed by "depends on the relative sizes of the two shifts," which is the phrase the rubric is looking for.
How this is graded
The checker reads every curve's position before and after your answer. You are marked correct only when Demand shifts right and Supply shifts right and every other curve on the Supply and Demand graph stays where it started — the same standard an AP reader applies to a drawn graph: the right shift, and nothing extra. There is no AI involved; the rubric is the geometry.
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