Suppose that natural gas and fuel oil are perfect substitutes in household energy consumption (heating). Now, crude oil inventories decrease due to an adverse technological shock. Crude oil is an input in the production of fuel oil. Assuming that the natural gas and fuel oil markets reach a final equilibrium after the crude oil shock, compare the final equilibrium to the initial equilibrium. What happened to the final equilibrium quantities of fuel oil and natural gas? What happened to the final equilibrium prices of fuel oil and natural gas?

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The decrease in the crude oil supplies is a negative supply side shock in the fuel oil market The effect of the decrease in this essential input is the decrease in the supply of fuel oil in the market ... View the full answer