Suppose the price of oil in Texas is initially $30 per barrel.New Mexico builds several large oil-burning power plants.This causes the price of oil in New Mexico initially to rise to $35 per barrel.According to the law of one price,what can we expect to happen to the price of oil in Texas and New Mexico,respectively,over the long run? Assume that it is difficult to transport oil from Texas to New Mexico.

Question

Quizplus · Accepted Answer

The law of one price states that in the long run, the price of a homogeneous good will be the same in all locations, taking into account transportation costs. However, in this scenario, it is difficult to transport oil from Texas to New Mexico, so the prices are likely to remain different. The initial increase in price in New Mexico may cause some companies in Texas to increase their prices, but in the long run, competition should keep the prices settling between $30 and $35 per barrel in both regions.

Suppose the Price of Oil in Texas Is Initially $30