Question

Suppose that the amount of people driving and flying drops dramatically. Furthermore, the amount of energy demanded by firms and government agencies drops dramatically too. At the same time, both Russia and Saudi Arabia dramatically increase their oil production. a. Based on these events, what will happen to the price of fuel (gasoline, jet fuel, heating oil, oil used in power plants, etc.)? How about the quantity? b. If both the demand and supply of fuel tend to be very inelastic, will this increase or lessen the impact on price and/or quantity (i.e. will this make the change(s) in part a. bigger or smaller)?

Answer 1

Answer 1 - The effect of the above situation can be shown in the graph given below-

- - a |

as we can see from the above graph , due to the fall in the demand and rise in supply of oil . the equlibrium price has reduced from P to P1.

The equlibrium quantity hyas increased from Q to Q1.

ANSWER 2 - As per the given condition , the tourist will show a larger response towards the cuts as compared to the businessmen. This because the tourists will tend to have a greater elastic demand and hence will resond more as a result of the tax cuts. The business on the other hand will show no or very less response as result of the tax cuts.