Question

5. Suppose that the price of gasoline rises sharply. What do you think would happen to the demand for smaller, more efficient cars? For leisure goods (like above ground pools)? For employment in the tourism industry? For goods that are trucked in from out of state? For energy sources other than gasoline? For oil drilling companies? For firewood?

Answer 1

Answer 5 –

Suppose that the price of gasoline rises sharply. What do you think would happen to the demand for smaller, more efficient cars? For leisure goods (like above ground pools)? For employment in the tourism industry? For goods that are trucked in from out of state? For energy sources other than gasoline? For oil drilling companies? For firewood?

· When the price of gasoline increases sharply, then the demand for large cars (such as SUV which have less mileage) decrease because the large cars and gasoline are complements. However, people who need vehicles to commute from one place to another would switch to smaller efficient cars. Because these fuel-efficient alternatives mean consumption of less gasoline and thus when the price of gasoline rises, the demand for smaller more efficient cars also increase rapidly.

· When price of gasoline increases sharply, leisure goods such as ground pools decrease because ground pools have heaters that use gasoline. Since it is an input for the ground pool, when the price of gasoline increases, the demand for such leisure goods decrease.

· Higher prices of gasoline would increase the cost of travelling and so people would reduce travelling. As a result, there would be reduced demand for people servicing in the tourism industry. Thus, employment would decrease in the tourism industry.

· The prices of those goods which are trucked in from out of the state would increase because the cost of transporting those goods would increase. Thus, the demand for such would reduce as well.

· The demand for alternative sources of energy such as solar power would increase. Alternative sources of energy and gasoline are substitutes. So, when the price of gasoline increases, the quantity of gasoline demanded falls as people switch to other alternative sources of energy.

· When the price of gasoline increases, the oil drilling companies (responsible for locating drilling sites and extracting oil) are profitable because they sell oil at a higher price but their costs of production are fixed. So, they would earn profits and they invest in new advanced machines to extract oil.

· The demand for alternative sources of fuel such as firewood would increase because firewood and gasoline are substitutes. So, when the price of gasoline increases, the quantity of gasoline demanded falls as people switch to other alternative sources of fuels like firewood.