Initially, the price of natural gas is $10 per 1,000 cubic feet, the price of an oil furnace is $2,000, the average annual household income is $40,000, the cost of crude oil is $25 per barrel of heating oil, and the cost of refining oil is $15 per barrel of heating oil. The equilibrium quantity in this market is 80 thousand barrels of heating oil per day, and the equilibrium price is $40.00 per barrel. Suppose that the cost of refining oil increases from $15 to $25 for each barrel of heating oil produced. Assuming that the rest of the determinants of supply and demand for heating oil remain equal to their initial values, the market will eventually reach a new equilibrium price of $50.00 per barrel. In the graph input tool, reset the price of heating oil to its equilibrium value that you found in the first question. Then reset the cost of refining oil to its initial value. (Hint: When you click in the box, you will see a circular arrow to the left of the box that enables you to reset numbers to their initial values.) Suppose that instead of a change in the cost of producing heating oil, there was an increase in the price of natural gas from $10 to $15 per 1,000 cubic feet. If the price of heating oil were to remain at the initial equilibrium price you found in the first question, there would be of heating oil, which would exert downward pressure on prices.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Need help with this. I did some don't know if its correct, please check it and let me know.

Suppose that instead of a change in the cost of producing heating oil, there was an increase in the price of natural gas from $10 to $15 per 1,000 cubic feet. If the price of heating oil were to remain at the initial equilibrium price you found in the first question, there would be_______(choose one: surplus or shortage) of heating oil, which would exert (choose one: downward or upward) pressure on prices.

Initially, the price of natural gas is $10 per 1,000 cubic feet, the price of an oil furnace is $2,000, the average annual household income is
$40,000, the cost of crude oil is $25 per barrel of heating oil, and the cost of refining oil is $15 per barrel of heating oil.
The equilibrium quantity in this market is
80 thousand barrels of heating oil per day, and the equilibrium price is
$40.00 per barrel.
Suppose that the cost of refining oil increases from $15 to $25 for each barrel of heating oil produced. Assuming that the rest of the
determinants of supply and demand for heating oil remain equal to their initial values, the market will eventually reach a new equilibrium price of
$50.00 per barrel.
In the graph input tool, reset the price of heating oil to its equilibrium value that you found in the first question. Then reset the cost of refining
oil to its initial value. (Hint: When you click in the box, you will see a circular arrow to the left of the box that enables you to reset numbers to
their initial values.)
Suppose that instead of a change in the cost of producing heating oil, there was an increase in the price of natural gas from $10 to $15 per
1,000 cubic feet. If the price of heating oil were to remain at the initial equilibrium price you found in the first question, there would be
of heating oil, which would exert downward
pressure on prices.

Suppose you are an analyst in the oil refinery industry and are responsible for estimating the equilibrium price and quantity of home heating oil.
To do so, you must consider factors that can affect the supply of and demand for heating oil.
Determinants of the demand for heating oil include household income, the price of an oil furnace (a complementary good for heating oil), and the
price of natural gas (a substitute good for heating oil). Determinants of the supply of heating oil include the cost of crude oil and the cost of
refining crude oil into home heating oil.
Use the graph input tool to help you answer the following questions. You will not be graded on any changes you make to the graph parameters.
(Note: Once you enter a value in a white field, the graph and any corresponding amounts in each grey field will change accordingly.)
PRICE (Dollars per barrel)
80
70
60
50
40
30
20
10
0
0
Market for Heating Oil
+
I
I
I
1
+
1
1
Supply
Demand
20 40 60 80 100 120 140 160
QUANTITY (Thousands of barrels per day)
Graph Input Tool
Market for Heating Oil
Price of Heating oil
(Dollars per barrel)
Quantity
Demanded
(Thousands of barrels
per day)
Demand Shifters
Price of Natural
Gas
(Dollars per 1,000
cubic ft.)
Price of an Oil
Furnace
(Dollars per furnace)
Average Annual
Income
(Thousands of
dollars)
30
100
10
2000
40
Quantity Supplied
(Thousands of barrels
per day)
Supply Shifters
Cost of Crude Oil
(Per barrel of heating
oil)
Cost of Refining
Oil
(Per barrel of heating
oil)
?
60
25
15

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