Question

4. Understanding changes In equillbrium price and quantity Aa Aa Suppose you are an analyst in the oil refinery industry and are responsible for estimating the equilibrium price and quantity of home heating oil. To do so, you must consider factors that can affect the supply of and demand for heating oil. Determinants of the demand for heating oll include household income, the price of an oil furnace (a complement to heating oil), and the price of natural gas (a substitute for heating oil). Determinants of the supply of heating oll include the cost of crude ail and the cost of refining crude olil Into home heating oll. Use the calculator to help you answer the following questions. You will not be graded on any changes y the calculator. ou make to r mouse to drag the green line on the graph. The values in the boxes on the right side of the Tool tip: Use you calculator will change accordingly. You can also directly change the values in the boxes with the white background b clicking in the box and typing. When you cdick the Calculate button, the graph and any related values will change accordingly. PRICE (Dollars per barrel) EQUILIBRIUM CALCULATOR: MARKET FOR HEATING OIL 80 70 60 50 40 + 30 Price of Heating Oil30 (Dollars per barrel Quantity Demanded 100 Quantity Supplied 60 Thousands of barrels/dayl Shortage Thousands of barrels/dayl DEMAND SHIFTERS Thousands of barrels/day (Thousands of barrels/day SUPPLY SHIFTERS 40 Surplus Price of Natural Gas 10 Cost of Crude Oi 25 Dollars per 1,000 cubic ft.l (Per barrel of heating oill 20 Price of an Oil Furnace (Dollars per furnacel 2000 Cost of Refining Oi Per barrel of heating oill 10 Average Annual Income Thousands of dollars 40 0 20 40 60 80 100 120 140 160 QUANTITY IThousands of barrels) Reset to Initial Values Calculate

Answer 1

1) 80 thousand

2) $40 is the equilibrium price because demand curve intersects supply curve at this price.

3) Increase in cost of crude oil increases the cost of production of good and thus decreases supply. Decrease in supply shifts supply curve leftwards causing equilibrium price = $ 55

4) Equilibrium price increases by 55 - 40 = $ 15

5) Price of natural gas is the substitute good for heating oil.

Increase in the price of natural gas increases the demand of heating oil as people substitute natural gas for heating oil. This shifts demand curve rightwards causing increase in equilibrium price and equilibrium quantity.

More demand of heating oil. Upward pressure on price.