Question

Assume the Congress approves increased drilling for oil in the U.S. to address the current energy shortage. People who are in favor of this policy argue that, ceteris paribus, this would cause:
A) an increase in the equilibrium price and quantity of oil.
B) a decrease in the equilibrium price and quantity of oil.
C) a decrease in equilibrium price and increase in the equilibrium quantity of oil.
D) an increase in equilibrium price and a decrease in the equilibrium quantity of oil.

Answer 1

Answer:

C) A decrease in equilibrium price and increase in the equilibrium quantity of oil.

Explanation:

Equilibrium price is the price in which the quantity of goods demanded matches the quantity of goods offered, same for the equilibrium quantity. When these two variables cross, we reach economic equilibrium.

If the U.S. drills more oil, the supply oil will increase, lowering the price until the demand for oil is met.

This is what is currently happening in the world: because the U.S. has increased oil production, the price of oil in the U.S. and the rest of the world has lowered. In other words, the equilibrium price of oil has decreased and the equilibrium quantity has increased.