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AP Micro Unit II ReviewScenario Based Application QuestionsMr. Stewart’s AP Microeconomics ClassFall Semester 2019*All of the following scenario questions will help you review for the Unit II test (semester final) and will be based off of the following commodity: oil/gas. Please make sure you answer ALL of the questions and practice writing ALL graphs that go along with the questions on a SEPARATE PIECE OF PAPER!!!***How would the supply curve be affected by a hurricane that wiped out several oil refineries in the Gulf of Mexico? What would be the corresponding impact on price and quantity supplied? Draw a graph that shows this.As the price of oil continues to fall below $36 a barrel, more and more American companies are no longer profitable, and have thus gone bankrupt and left the market. At the same time, increased production in the Middle East, especially form Iraq and now Iran, whose sanctions on their economy have been lifted have created a global supply glut. As a result, the United States government has decided to institute a tariff on foreign oil. Draw two graphs (one for U.S. oil and one for foreign oil) demonstrating the effect on equilibrium price and quantity the tariff would cause.As the world supply of oil continues to increase, many emerging countries have begun to slow their development. At the same time, China and the United States, the two largest oil consumers in the world, have seen lower demand for oil and similar products. What will happen to the price of oil if this trend continues and how does this demonstrate the concept of “surplus” and “market forces”? Although there is a current massive surplus of oil, this will only last in the “short run” (NOW). What will happen to the surplus of oil in the “long run” (IN THE FUTURE), and why does this demonstrate why markets are considered “allocatively efficient”?As oil prices continue to crash, there has been an increasing amount of tension among members of OPEC, the cartel that controls roughly 70% of the world’s oil supply, and thus has a tremendous amount of power when it comes to setting production levels and manipulating prices. Recently, there have been disagreements between the members with lower production costs, such as Saudi Arabia and the UAE, and countries with higher production costs, such as Venezuela and Nigeria. How do production costs affect supply (the supply curve), producer surplus, and determining whether you are a “seller” or “non-seller”?Why would a consumer who purchases an all-electric hybrid vehicle, not have “demand” for gas? What do you need to have in order to have demand? Would a change in the price of gas affect demand for gas? Why or why not? What are the only things that affect all of demand, or the entire demand curve? As the price of gas goes up, quantity demanded goes down, what is this concept known as? However, this is not always the case. What would be an explanation as to why someone might have to continue to buy gas even as the price goes up? If I am a delivery driver, and my job depends on me transporting goods, and I have no other choice but to drive, what will my demand curve for gas look like?The demand curve is always downward sloping. What relationship is this demonstrating? What do economists call this relationship? What would cause the curve to be more vertical or more horizontal? What does the shape of the curve represent? Draw two graphs that show a more horizontal demand curve, and what that represents, and a more vertical demand curve and what that represents.As the price of gas goes down, drivers tend to buy larger and larger vehicles. In fact, when gas prices began their downward trend, the sales of Chevy Tahoe’s skyrocketed. What determinant of demand does this demonstrate? If, as the price of gas goes down, Tahoe sales (demand) increases, what types of goods must these be?The price of oil skyrocketed in the early 2000’s. As a result, the government invested heavily in the development and production of alternatives such as ethanol. If, as the price of oil rose, more and more ethanol was demanded, what type of goods must these be? If the government heavily subsidized the cost of ethanol, what impact would this have on the supply curve for ethanol? Draw a graph that represents this.Gas used to be considered very inelastic. As more and more substitutes become available for gas (ethanol, hydrogen fuel cells, all electric vehicles), what has happened over time? Draw two separate demand curves for gas; the first showing the old inelastic demand for gas, and the second showing the more elastic demand curve as more substitutes continue to develop over time.When gas prices skyrocketed in 2008, in coincided with the onset of the one of the worst economic recessions in the United States since the Great Depression. Suddenly gas was taking up a larger and larger percentage of people’s budgets. Eventually people started to look for alternatives such as taking the train, carpooling, bicycling and even walking their lazy butts’ places. What effects does this behavior demonstrate? How would this change in behavior affect the demand curve for gas, and what would the resulting change to price and quantity demanded be?For most people, as they make more money, they are able to move farther and farther away from where they work, increasing their demand for gas. If people spend more money on gas as their incomes rise, what type of good must gas be? In addition, people tend to buy nicer and more luxurious cars as their incomes rise. If I switch to buying a Lexus instead of a Toyota when I get a newer higher paying job, what type of good is the Toyota? If a new government report was released showing that Americans are making more money this year, and as a result are traveling more and taking more vacations. What impact would this have on the demand and the demand curve for gas? What would be the corresponding changes to price and quantity demanded?As oil prices rose in the mid-2000’s, many major and smaller oil companies began to take on larger and more expensive production projects. Now that oil prices are crashing, many of these smaller and less profitable oil companies no longer can produce. Why are they no longer considered “sellers” or why are they no longer considered as part of the “supply”?Why do producers want to produce more as prices rise? What do we call this in economics? What type of relationship does this show? How does this affect the direction of the supply curve? If the price of oil changes, what is the ONLY thing that will be affected? The United States has a tax on gas that is used primarily to fund road projects around the country. The gas tax hasn’t been raised since the early 1990’s. If congress finally decided to raise the gas tax, how would this affect the supply and the supply curve for gas? What would be the corresponding change to price and quantity supplied? Show this graphically.Oil is a critical component of plastic production. As well as other products such as certain types of paints and fuels. If the cost of oil increases, how is that going to affect the supply and supply curve for products like plastic and paint?Oil prices fluctuate constantly. What are they fluctuating towards? What does it cause if prices are above equilibrium? What about below? What would the market do if prices are above equilibrium? What would they do if they are below equilibrium?What is it called where the supply curve and the demand curve meet/intersect? What is equal? What does this represent? What are the only things that can cause a change in this?Markets are considered “allocatively efficient”. Even if there is a surplus or shortage in the “short run”, they rarely last. In addition, there is almost never any waste (high cost production for low value buyers). Currently, oil prices are falling and there is a surplus of oil. What does a surplus represent? How will the surplus eventually be solved?As oil prices go down, people tend to buy more and larger cars, and when oil prices go up, people tend to buy fewer and smaller cars. Draw two graphs, one for Chevy Tahoe’s when gas prices fall, and one for Toyota Prius’s when gas prices rise. What happens to consumer surplus in each scenario?What are the only ways to increase or decrease consumer or producer surplus? What is literally happening when it comes to buyers and sellers, or non-buyers and non-sellers? Why are businesses who have the lowest production costs always the winners? Why do the people at the top of the demand curve have the highest consumer surplus? What are they willing to do? What happens to buyer’s consumer surplus, and thus marginal benefit, as you go down the curve?Total surplus/economic surplus represents the value from all of the gains from trade from both buyers and sellers, consumers and producers. In order to increase this area, either supply or demand, and thus the curve, must increase. How can demand or supply for oil increase? How would you calculate the value of this additional benefit? What happens to the gains from trade, or the benefit to society if demand or supply decrease? What might cause this and how would you calculate the loss?For many years gas was always considered inelastic. Why? In recent years, gas has become more elastic. What caused this change? How would this be calculated? How would this be shown graphically? If the elasticity was equal to one, it would represent an equal change in quantity and price, what type of elasticity is this? What would we call the elasticity if the elasticity of oil affects the elasticity of ethanol? Would producers of oil rather be elastic or inelastic? Why? ................
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