Question

How would 'Standard Oil' respond to an expected change in oil prices?

• A. Supply increases if a price hike is expected
• B. Supply decreases if a price hike is expected
• C. Supply increases if a fall in price is expected
• D. Supply decreases if a fall in price is expected

Answer 1

Answer: (B), (C)

The correct options are
B

Supply decreases if a price hike is expected

C

Supply increases if a fall in price is expected

If a price hike is expected, a firm would supply less and store for the future. If a fall in price is expected, a firm would supply more to sell out its stock. Both choices are driven by a desire to maximize profit. In contrast, a consumer would by more when there is an expected price hike and buy less when there is an expected fall in price.