Question

The exhibit shows how supply and demand might shift in response to specific events. Suppose oil becomes more expensive. Which panel best describes how this will affect the market for gasoline, which is made from oil? A. Panel (a) B. Panel (b) C. Panel (c) D. Panel (d)

Answer 1

If oil becomes more expensive, it increases the cost of producing gasoline, resulting in a decrease in supply. In supply and demand terms, this leads to a leftward shift in the supply curve, increasing the equilibrium price and reducing the equilibrium quantity.

Step-by-step explanation:

If oil becomes more expensive, the cost of producing gasoline, which is refined from oil, also increases. This situation is not represented by an increase in oil supply as depicted in panel C, but it does lead to a decrease in supply of gasoline. This is because the increased cost reduces the profitability of producing gasoline, prompting suppliers to decrease the quantity supplied at each price.

In terms of a supply and demand graph, this situation corresponds to a leftward shift in the supply curve, which increases the equilibrium price and decreases the equilibrium quantity. Therefore, none of the provided panels seem to perfectly represent this scenario since the perfect illustration would show a leftward shift in the supply curve.

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