Equilibrium Price and Cost Analysis of Heating Oil Market

What happens to the equilibrium price of heating oil when the cost of refining oil increases?

a) $10 per barrel, $35,000.

b) $15 per barrel, $35,000.

c) $10 per barrel, $40,000.

d) $15 per barrel, $40,000.

Answer:

The new equilibrium price of heating oil will be $15 per barrel when the cost of refining oil increases to $25 per barrel, and the income changes to $35,000. The correct option is B.

Initially, the equilibrium price of heating oil in the market is $5 per barrel with specific data points such as the price of natural gas, the price of an oil furnace, and average annual household income. When the cost of refining oil increases from $15 to $25 per barrel, the supply curve shifts to the left due to the higher production cost.

As a result of the increase in the cost of refining oil, the supply of heating oil decreases, leading to a decreased equilibrium quantity and an increased equilibrium price. This change in the cost of refining oil directly impacts the market dynamics of heating oil.

However, the change in household income from $40,000 to $35,000 is not directly related to the change in the cost of refining oil. Therefore, it does not affect the new equilibrium price of heating oil in the market.

Therefore, the correct answer is option b) $15 per barrel, $35,000, as the increase in the cost of refining oil is the primary factor contributing to the change in equilibrium price in the heating oil market.