Let D₀ and S₀ be the initial demand and supply curves for gasoline. Let P₀^* and Q₀^* be the initial equilibrium in this market. There is an OPEC cartel that reduces the production of world oil by several million barrels a day. Which ONE of the following correctly captures the effect of this change on the market for gasoline?

Question

Quizplus · Accepted Answer

The reduction in production of world oil by OPEC cartel will cause an increase in the price of oil. As gasoline is derived from oil, the increase in the price of oil will lead to an increase in the cost of producing gasoline. This will shift the supply curve SS1U1B10S1U1B0 to the left, from SS1U1B10S1U1B0 to SS1U1B10S1U1B1.

As a result, the new equilibrium point will be at a higher price PS1U1B10S1U1B0S1U1P1*S1S1P0 and a lower quantity QS1U1B10S1U1B1S1U1P1*S1S1P0. Therefore, the equilibrium quantity will decrease (due to the decrease in supply) and equilibrium price will increase (due to the increase in cost of production). Hence, the correct choice is D.

Let D0 and S0 Be the Initial Demand and Supply

Let D₀ and S₀ Be the Initial Demand and Supply