Question

A recent news story reported that the Organization of Petroleum Exporting Countries is expected to decrease the supply of oil next summer. Summer is traditionally a time of increased demand for oil because of vacation travel. What would be the combined effect of these two events on the summer market for gasoline? a. an increase in the price and the quantity.b. an increase in the price and an un-predictable change in the quantity.c. an un-predictable change in both the price and the quantity.d. an un-predictable change in the price and a decrease in the quantity.

Answer 1

Answer:

The answer is: b

Explanation:

At equilibrium the quantity of oil supplied is equal to the quantity of oil demanded at the equilibrium price. In summer, two events will occur which will trigger a move from equilibrium.

• A decrease in the supply of oil

Holding all else constant, a leftward shift in the supply curve leads to higher oil prices and lower quantities of oil.

• An increase in the demand for oil

Holding all else constant, a rightward shift in the demand curve leads to higher oil prices and higher quantities of oil.

In both scenarios, the shifts will result in higher oil prices but the change in quantity is ambiguous.