Answer to Question #241351 in Microeconomics for salim

Question

15. As a result of increased tensions in the Middle East, oil production is down by 1.21 million

barrels per day—a 5 percent reduction in the world’s supply of crude oil. Explain

the likely impact of this event on the market for gasoline and the market for small cars.

(LO1, LO3, LO5

Answer 1

Solution:

A 5 percent reduction in the world’s supply of crude oil will lead to shortages of gasoline in the gasoline market. This will lead to an increase in the demand for gasoline, which will ultimately push the prices of gasoline up. Therefore, the market for gasoline will increase due to higher demand for the product.

The market for small cars will increase due to increased demand since more consumers will prefer small cars to big cars. This is because big cars consume a lot of gasoline, which is scarce and very expensive, making it harder for people to maintain. As such, people will rather purchase small cars which are efficient in fuel management, making them cheaper in terms of maintenance.