Answer to Question #224029 in Microeconomics for Tobex

Question

Suppose that the following events occur one at a time: 

The price of crude oil rises. 

The price of a car rises. 

All speed limits on highways are abolished. 

Robot technology cuts car production costs. 

Which of these events will increase or decrease (state which): 

The demand for petrol? 

The supply of petrol? 

The quantity of petrol demanded? 

The quantity of petrol supplied?

Answer 1

Solution:

i.). The demand for petrol will decrease, when the price of cars rises since the quantity of cars purchased will decrease. At the same time, if all speed limits on highways are abolished, people will drive faster and use more petrol. Therefore, the demand for petrol will increase. If Robot technology cuts car production costs, the supply of cars will increase. Therefore, the prices of the cars will fall and more cars will be purchased and hence the demand for petrol will increase.

 

ii.). The supply of petrol will decrease if the price of crude oil rises since the cost of producing petrol will rise.

 

iii.). The quantity demanded for petrol will decrease as the price of petrol increases, which will also result in a decrease in the supply of petrol.

 

iv.). The quantity of petrol supplied will decrease when the price of petrol falls and there is a movement down the supply curve of petrol. But if the price of a car increases, the quantity of cars purchased will decrease, including the demand for petrol, hence the supply of petrol will remain unchanged.

If all speed limits on highways are abolished, people will drive faster and use more petrol. The demand for petrol will increase which will increase its price, resulting in an increase in the quantity of petrol supplied.

If robot production cuts down the cost of producing a car, the supply of cars will increase, which will result in a fall in car prices and more cars will be purchased. The demand for petrol will increase, resulting in an increase in the price of petrol, hence the quantity of petrol supplied will increase.