Business Degree Certification Practice Test

What will happen to price and quantity in the world petroleum market if OPEC reduces production by 10 percent and the world economy growth rate escalates?

1. Price will increase, but quantity will remain unchanged

2. Price will increase, but quantity is indeterminate

3. Quantity will increase, but price is indeterminate

4. Both price and quantity will increase

The correct answer is: Price will increase, but quantity is indeterminate

The scenario described involves two key factors: OPEC reducing production by 10 percent and an escalation in the world economy's growth rate. When OPEC reduces production, it results in a decreased supply of oil in the global market. A decrease in supply, all else being equal, tends to drive prices up because there’s less oil available to meet the same level of demand. On the other hand, an escalating world economic growth rate usually leads to an increased demand for oil, as economic growth typically fuels higher energy consumption. With rising demand for oil, one might expect that the quantity of oil sold would also increase. However, in this case, OPEC's production cut limits the available supply of oil. This creates a situation where the net effect on quantity becomes less certain—it could either remain the same or decrease if the supply reduction outpaces the increase in demand. Thus, while the price of oil is expected to increase due to the reduced supply, the actual change in quantity becomes indeterminate because it depends on the scale of demand increase versus the supply decrease. Therefore, it's concluded that price will definitely increase, but quantity cannot be precisely determined without more detailed information on how demand responds to the economic growth.