Starting with AD₁ and AS₁ in the graph below, if the world price of oil rises, then in the short run: A) output stays the same and prices fall B) output decreases and prices fall C) output decreases and prices rise D) output increases and prices rise E) output stays the same and prices rise

Question

Quizplus · Accepted Answer

Both AD₁ and AS₁ are producing oil at their maximum capacity, meaning that their output cannot be increased. If the world price of oil rises, then the marginal revenue of each firm will rise as well. However, since their output is already at its maximum level, the only way for the firms to respond to the increased price is to increase their price as well. This will result in a decrease in the quantity demanded of their oil, leading to a decrease in output. As a result, in the short run, output will decrease and prices will rise.

Starting with AD1 and AS1 in the Graph Below, If

Starting with AD₁ and AS₁ in the Graph Below, If