Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
It increases both supply and demand for gasoline.
B
It decreases supply of gasoline and increases prices.
C
It has no effect on the market equilibrium.
D
It increases supply of gasoline and decreases prices.
Understanding the Answer
Let's break down why this is correct
Answer
When there is an external shock like a sudden increase in oil prices, it affects the market equilibrium for gasoline by changing the supply. Oil is a key ingredient in making gasoline, so when its price rises, it costs more for companies to produce gasoline. This means that the supply of gasoline will decrease because producers might not want to make as much if they can't cover their costs. As a result, the supply curve shifts to the left, leading to higher gasoline prices and less gasoline available in the market. For example, if the price of oil jumps from $50 to $100 a barrel, gasoline prices might rise significantly, making it more expensive for consumers to fill up their cars.
Detailed Explanation
When oil prices go up, it costs more to make gasoline. Other options are incorrect because Some might think that higher oil prices would increase demand for gasoline; It's a common mistake to think that changes in oil prices don't affect gasoline.
Key Concepts
market equilibrium
external shocks
Topic
Supply and Demand Analysis
Difficulty
medium level question
Cognitive Level
understand
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