3. Understanding changes in equilibrium price and quantitySuppose you are an analyst in the oil refinery industry and are responsible for estimating the equilibrium price and quantity of home heating oil. To doso, 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 theprice 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 refiningcrude 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)80706050403020100Market for Heating Oil+111ISupply+1 Demand0 20 40 60 80 100 120 140 160QUANTITY (Thousands of barrels per day)Graph Input ToolMarket for Heating OilPrice of Heating oil(Dollars per barrel)The equilibrium quantity in this market isQuantityDemanded(Thousands ofbarrels per day)Demand ShiftersPrice of NaturalGas(Dollars per 1,000cubic ft.)Price of an OilFurnace(Dollars per furnace)Average AnnualIncome(Thousands ofdollars)3010010200040Quantity Supplied(Thousands ofbarrels per day)Supply ShiftersCost of Crude Oil(Per barrel ofheating oil)Cost of Refining Oil(Per barrel ofheating oil)(?)thousand barrels of heating oil per day, and the equilibrium price is $6025Initially, 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.15per barrel.Suppose that the cost of refining oil increases from $15 to $25 for each barrel of heating oil produced. Assuming that the rest of the determinantsof supply and demand for heating oil remain equal to their initial values, the market will eventually reach a new equilibrium price ofper barrel.$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 toits 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 initialvalues.)Suppose that instead of a change in the cost of producing heating oil, there was a decrease in the price of an oil furnace from $2,000 to $1,900. If theprice of heating oil were to remain at the initial equilibrium price you found in the first question, there would be▼ of heating oil, whichwould exertpressure on prices.

Question

Accepted Answer

Equilibriummarket supply and demand must balance one another to reach equilibrium, which leads to…