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Question

Difficulty: HardTypes of Supply

An oil refinery in Nigeria expands its distillation operations to satisfy a surge in domestic demand for Premium Motor Spirit (PMS). Because diesel and bitumen are derived from the exact same crude oil refining process alongside PMS, how will the market supply of diesel be affected?

  1. The supply of diesel will increase automatically as an inescapable byproduct of PMS refining.Answer
  2. B
    The supply of diesel will contract because refining capacity is redirected away from diesel toward PMS.
  3. C
    The supply of diesel will remain entirely unaffected because consumer demand for diesel is independent of PMS demand.
  4. D
    The market price of crude oil will decline immediately due to joint supply equilibrium.

Answer

The supply of diesel will increase automatically as an inescapable byproduct of PMS refining.
PMS and diesel are byproducts of crude oil refining, representing joint (complementary) supply. Increasing the output of PMS requires processing more crude oil, which automatically increases the market supply of diesel.

Step-by-Step Solution

1
Identify the production relationship between the goods.
PMS and diesel originate from processing a single raw input (crude oil) in a single refining process.
Goods produced together from one source are in joint (or complementary) supply.
2
Analyze the impact of increased PMS refining output on diesel.
Expanding the distillation of crude oil for PMS automatically yields extra diesel and other fractions.
In joint supply, increasing the supply of the main product inherently increases the supply of the byproduct/joint product.

Key Concept

Joint (Complementary) Supply
Estimated Time:1m 30s
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Topics

Types of Supply

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