Question 3

3) Consider the following sequence of events in the market for gasoline in Cedar Falls, Iowa during the years 1999-2000. Graph (illustrate) the supply and demand functions for every case (a)-(c) and demonstrate their changes according to the descriptions.

a) 1999:The year was uneventful.The price of one gallon of gasoline was $1.25 and 17.5 million gallons were sold.

b) 2000:There was a shortage of oil from the Middle East.As a result, the price of gasoline rose to $1.75 and only 12.5 million gallons were sold.

c) 2001:The shortage of oil from the Middle East ended and demand and supply moved back to their original position given in (a).Low consumer incomes, however, caused many consumers to cancel their vacations.As a result, the price of gasoline fell to $1.00 and only 17.0 million gallons were sold.