Suppose you are an analyst in the oil refinery industry

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 calculator to help you answer the following questions. You will not be graded on any changes you make to the calculator.

(Note: Once you enter a value in a white field, the graph and any corresponding amounts in each grey field will change accordingly.)

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_________________ thousand barrels of heating oil per day, and the equilibrium price is $____________________ per barrel.

Suppose that the cost of crude oil decreases from $25 to $20 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 $ ___________________per barrel.

Reset the calculator to its initial values. (Hint: When you click in the box of any changed values, 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 average annual income from $40,000 to $50,000. If the price of heating oil were to remain at the initial equilibrium price you found in the first question, there would be ( a shortage or supply or a surplus) of heating oil, which would exert (downward or upward) pressure on prices.

 

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