Suppose Elon Musk is developing a new car that runs entirely on biofuels (a renewable energy source), yet it is so expensive that it currently costs approximately $2 per mile to drive. Under current prices, a conventional car cost uses roughly $0.60 per mile in gas. Assume the gas used in cars cannot be used anywhere else.

(a) If we consider solar to be a ‘backstop’ technology for the gas in conventional cars, draw the long-run price path of $ per mile for gasoline. Indicate the time the solar technology becomes ‘relevant’ with t∗.

when backstop technology becomes relevant

(b) Suppose the government introduces CAFE standards that are more strict than ex- listing ones, meaning the regulated miles per gallon drops and cars must be more efficient by law (thus using less fuel for every mile driven). Draw the new price path and label the time the solar technology becomes ‘relevant’ in this scenario with t∗∗. How does t∗∗ compare with t∗?

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