Assume that the market for gasoline in Chicago is competitive and that on a given day the market price is $4.00 (per gallon) and that 20,000 gallons are sold.

a. Draw a diagram of the Chicago gasoline market (i.e., supply and demand), carefully labeling all axes, curves, and numbers.

b. Explain, both verbally and graphically, what would happen to the price of gas in Chicago if a new war in the Middle West caused a drastic cutback in the supply of oil. (Note: oil is an input into the production of gasoline. A change in the supply of oil is not the same thing as a change in the supply of gas, but…)

c. Explain, both verbally and graphically, what would happen to the price of gas in Chicago if a new economic recession caused people to drive a lot less.