Reference no: EM13207380
In 1970 and 1980, the nominal price of motor fuel rose much more rapidly than the general price level, pushing up the relative price of motor fuel. As we would expect, the quantity sold decreased. In 1981 and 1982, the relative price leveled off and then began to fall; but the quantity sold began to fall. Which one or more of the following hypotheses do you think best explains the behavior of motor fuel sales in 1981 and 1982? Illustrate each hypothesis with a supply and demand curve.
A. In the 1970's the demand curve had the usual negative slope. However, in 1981 and 1982, the demand curve shifted to an unusual positively sloped position.
B. The demand curve had a negative slope throughout the period. However, the recession of 1981 and 1982 reduced consumers' real incomes and thus shifted the demand curve.
C. The demand curve has a negative slope at all times, but the shape depends partly on how much time consumers have to adjust to a change in prices. Over a short period of, the demand curve is fairly steep because few adjustments can be made. Over the long term, it has somewhat flatter slope because further adjustments, such as buying more fuel-efficient cars or moving closer to the job, can be made. Thus, the decreases in fuel sales in 1981 and 1982 were delayed reactions to the price increases that occurred in 1979 and 1980.
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