Question

Directions: For each question, show what happens to Equilibrium price (P) and quantity (Q) using supply-demand analysis. Clearly state your conclusion (e.g., "equilibrium price increases, while equilibrium quantity decreases" using the short-hand " ^P and vQ"). Be sure to complete and correctly label your graphs.

Question 5:

Part A:

An important ingredient/input in the production of gasoline is petroleum. Suppose there is a technological innovation - let's call it hydraulic fracturing ("fracking") - in the production of petroleum. Ceteris paribus, what is the predicted impact on the equilibrium price and quantity of gasoline?

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Conclusion:

Part B:

Suppose perhaps due to environmental concerns, there is a decline in taste for gas guzzling vehicles such as SUVs. Ceteris paribus, what is the predicted impact on the equilibrium price and quantity of gasoline?

-> Insert graph

Conclusion:

For part C and D, supposed Part A and Part B happen Simultaneously (i.e., there is an increase in technology in the production of crude oil and a decrease in the taste/preference for gas guzzlers).

Part C:

Assuming the magnitude of the impact on the gasoline market of the change in technology is large, while the change in taste for gas guzzlers is small.

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Conclusion:

Part D:

Assume that the magnitudes of the changes are equal (completely offsetting).

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Conclusion:

Answer 1

Part A: Supply increases due to technological innovation.

Equilibrium P decreases and Q increases.

Part B: Demand for gasoline decreases.

Equilibrium P and Q decreases.

Part C:

Equilibrium P decreases and Q increases.

Part D:

Equilibrium P decreases and Q remains same.