Question

30 Price or eating Oil (Dollars per barrel) Quantity Demanded (Thousands of barrels per day) 100 60 Quantity Supplied (Thousands of barrels per day) PRICE (Dollars per barrel) Demand Shifters Supply Shifters Gas Cost of Crude Oil (Per barrel of heating on Price of Natural (Dollars per 1,000 cubicit) Price of an Oil Furnace (Dollars per furnace) Average Annual Income (Thousands of dollars) 2000 Cost of Refining of (Per barrel of heating oil) 20 40 60 80 100 120 140 160 QUANTITY (Thousands of barrels per day) 40 Initially, the price of natural gas is $10 per 1,000 cubic feet, the price of an oil furnace is $2,000, the average annual household Income is $40,000, the cost of crude oil is $25 per barrel of heating oil, and the cost of refining oil is $15 per barrel of heating oil. The equilibrium quantity in this market is thousand barrels of heating oil per day, and the equilibrium price is $ per barrel. Suppose that the cost of refining oil increases from $15 to $25 for each barrel of heating oil produced. Assuming that the rest of the determinants of supply and demand for heating oil remain equal to their initial values, the market will eventually reach a new equilibrium price of $ . per barrel. Reset the calculator to its initial values. (Hint: When you click in the box of any changed values, you will see a circular arrow to the left of the box that enables you to reset numbers to their initial values.) Suppose that instead of a change in the cost of producing heating oil, there was a decrease in the price of an oil furnace from $2,000 to $1,900. If the price of heating oil were to remain at the initial equilibrium price you found in the first question, there would be of heating oil, which would exert pressure on prices.

Answer 1

Salution: As the graph indicates, The equilibrium quantity in this market is 80 thousand barrels of heating oil per dy day and the equilibrium price is $40 per barrel. when cost of refining oil increases from $15 to $25, supply carre shifts vertically upwards by $10. Thus new equilibrium price will be $45 per barrel. The price of oil furnace decreases from $2000 to $1900 te a decrease of 5%.. This will induce increase in demand for heating oil by st. & Demand curve will shift to right or vertically up by St.. 9f price of heating oil were to remain at initial equilibrium price of $40, there would be excess demand which would exert upward pressure on prices. This is because new equilibrium price would be 440 $42 and at $40 den there will be shortage.