Question

If terrorists destroy a major oil pipeline in Iraq, the market for oil will experience a decrease in supply and equilibrium price will rise while equilibrium quantity decreases.

Is this true or false?

Answer 1

Let SS be initial supply curve of oil and DD be the initial demand curve of oil. Initial equilibrium point is the point of intersection of initial demand and supply curves.Let Qo represents the initial equilibrium quantity and Point Po represents the initial equilibrium price.

Price P1 Q1 Qo Quantity

Now a major pipeline is destroyed by a terrorist, It can be shown by shifting the supply curve to left. Supply will decrease for every price level. New supply curve is S1. New equilibrium point is the point of intersection of new supply curve and demand curve. So,

New equilibrium price=P1

New equilibrium quantity=Q1

We can see that P1>Po and Q1<Qo.

So, given statement is true.