Suppose the price of crude oil used to produce gasoline rises significantly. At the same time, consumers purchase hybrid cars in great numbers. In the market for gasoline, the market clearing price ________ and the equilibrium quantity ________.

Question

Quizplus · Accepted Answer

The rise in crude oil prices increases production costs, shifting the supply curve left, which tends to increase price and decrease quantity. The increase in hybrid car purchases reduces demand for gasoline, shifting the demand curve left, which tends to decrease price and quantity. The combined effect on price is indeterminate, but the equilibrium quantity definitely falls.

Suppose the Price of Crude Oil Used to Produce Gasoline