Critical Thinking Questions

1) Suppose the price of gasoline is $1.60 per gallon. Is the quantity demanded higher or lower than at the equilibrium price of $1.40 per gallon? And what about the quantity supplied? Is there a shortage or a surplus in the market? If so, of how much?

2) Why do economists use the ceteris paribus assumption?

3) Many changes are affecting the market for oil. Predict how each of the following events will affect the equilibrium price and quantity in the market for oil. In each case, state how the event will affect the supply and demand diagram. Create a sketch of the diagram if necessary.

A) Cars are becoming more fuel efficient, and therefore get more miles to the gallon.

B) The winter is exceptionally cold.

C) A major discovery of new oil is made off the coast of Norway.

D) The economies of some major oil-using nations, like Japan, slow down.

E) A war in the Middle East disrupts oil-pumping schedules.

F) Landlords install additional insulation in buildings.

G) The price of solar energy falls dramatically.

H) Chemical companies invent a new, popular kind of plastic made from oil.

4) Consider the demand for hamburgers. If the price of a substitute good (for example, hot dogs) increases and the price of a complement good (for example, hamburger buns) increases, can you tell for sure what will happen to the demand for hamburgers? Why or why not? Illustrate your answer with a graph.

5) Suppose there is soda tax to curb obesity. What should a reduction in the soda tax do to the supply of sodas and to the equilibrium price and quantity? Can you show this graphically? Hint: assume that the soda tax is collected from the sellers