Question

g If oil executives read in the newspaper that massive new oil supplies have been discovered under the Pacific Ocean but will likely only be useful in 10 years, what is likely to happen to the supply of oil today? What is the likely equilibrium impact on the price and quantity of oil today?

Answer 1

a. What is likely to happen to the supply of oil today?

The supply of oil will increase today because the oil executives will no longer be worried about limiting supply on account of the current reserves running out because the oil reserves discovered that will be ready in 10 years will become the new supply source when the current reserves run out.

b. What is the likely equilibrium impact on the price and quantity of oil today?

As the supply oil will increase in the present, the Equilibrium quantity will increase.

With an increase in the equilibrium quantity, prices will decrease as oil will no longer be as scarce.