Supply and Demand: the Revenge of the Exogenous Shock. In this problem, we consider many changes (exogenous shocks) that can affect the market for oil. Predict how each of the following events will affect the equilibrium price and quantity in the market for oil.

  • In each case, sketch a supply and demand diagram (model) to support your answer, using the 4-step process we derived in class and perform equilibrium analysis (what happens to Q and P in equilibrium). You must create an original figure. Depict demand for oil as price inelastic.
  • Solve for all eight of these shocks using the 4-step process.  State what type of shock each represents.
  • Be clear and use words in captions to describe your eight figures and your analysis (what’s going on in the market, Bloomberg style).

a. Cars are becoming more fuel efficient, and therefore get more miles to the gallon. 

b. The winter is exceptionally cold this year.

c. A major discovery of new oil is made off the coast of Norway.

d. The economies of some major oil-using nations, like Japan, slow down.

e. A war in the Middle East disrupts oil-pumping schedules.

f. Landlords install additional insulation in buildings.

g. The price of solar energy falls dramatically.

h. Chemical companies invent a new, popular kind of plastic made from oil.

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