Economics Problems

Background information

“After crude oil is refined into gasoline and other petroleum products, the products must be distributed to consumers. Most gasoline is shipped first by pipeline to storage terminals near consuming areas and then loaded into trucks for delivery to individual gas stations” (http://www.eia.gov/energyexplained/index.cfm?page=gasoline_where).

Richmond is home to storage terminal and gasoline in Richmond normally comes from this terminal. The nearest other storage terminal are in Roanoke, Maryland, or North Carolina. Normally trucks deliver gasoline to areas near their terminals because of the added expense of driving longer distances. The only time trucks deliver to areas near other terminals is when the price so much higher near the other terminal that the higher price covers the added expense.

Scenario

Suppose that a hurricane destroys the storage terminals near Richmond, VA and makes the terminals unusable. The destruction of the terminal near Richmond means that trucks must deliver gasoline to Richmond from terminals in Roanoke, Maryland, or North Carolina. The destruction also reduces the total amount of gasoline that trucks can deliver to the East Coast.

What we would like to see

I think most people would agree that the following responses are socially desirable:

1. People in Richmond reduce their consumption of gasoline by eliminating more unnecessary trips and using fuel-efficient cars more frequently instead of gas guzzlers and using public transportation more often,

2. Truckers in Roanoke, Maryland, or North Carolina divert to Richmond some of the gasoline they normally distribute locally.

3. People in Roanoke, Maryland, or North Carolina reduce their consumption of gasoline.

Questions

1. Draw a supply and demand graph to show how the destruction of the storage terminal in Richmond would affect the equilibrium price and quantity of gasoline in Richmond.

2. What happens to the equilibrium price of gasoline in Richmond?

1. Price increases

2. Price decreases

3. Price remains constant

4. The effect on price is indeterminate; price may rise, fall, or remain the same.

3. What happens to the equilibrium quantity of gasoline in Richmond?

1. Quantity increases

2. Quantity decreases

3. Quantity remains constant

4. The effect on quantity is indeterminate; quantity may rise, fall, or remain the same.

4. Would drivers in Richmond eliminate more unnecessary trips?

1. Yes

2. No

Explain why or why not.

1. Would drivers in Richmond who own two cars use more more fuel-efficient cars more frequently instead of gas guzzlers?

1. Yes

2. No

Explain why or why not.

1. Would truckers from Roanoke, Maryland, or North Carolina divert to Richmond some of the gasoline they normally distribute locally?

1. Yes

2. No

Explain why or why not.

1. Draw a supply and demand graph to show how your answer to question 8 would affect the equilibrium price and quantity of gasoline in Roanoke, Maryland, or North Carolina.

2. What happens to the equilibrium price of gasoline in Roanoke, Maryland, or North Carolina?

1. Price increases

2. Price decreases

3. Price remains constant

4. The effect on price is indeterminate; price may rise, fall, or remain the same.

3. What happens to the equilibrium quantity of gasoline in Roanoke, Maryland, or North Carolina?

1. Quantity increases

2. Quantity decreases

3. Quantity remains constant

4. The effect on quantity is indeterminate; quantity may rise, fall, or remain the same.

4. Would drivers in Roanoke, Maryland, or North Carolina reduce their consumption of gasoline?

1. Yes

2. No

Explain why or why not.