Question

During the last few years we have seen a rise in the production of natural gas in the United States. This lead to a decline in the price of natural gas. If we assume that the price of oil remained roughly the same, this also lead to a reduction in the ratio of the price of natural gas to the price of oil. This resulted in a substitution from oil to natural gas in some production processes. Which of the following statements is incorrect in describing this scenario (assume that all else is held constant):

A. The demand for oil changed
B. The quantity demanded of oil decreased
C. The quantity demanded of natural gas increased
D. The demand for oil decreased

Answer 1

Answer: The correct answer is "B. The quantity demanded of oil decreased".

Explanation: The statement "B. The quantity demanded of oil decreased" is incorrect in describing this scenario because a change in the quantity demanded would be caused by a change in the price, in this case the price of oil remained more or less the same, therefore the change is in demand, and is produced at the price of a substitute good (natural gas) low.