Practice Questions 4 with solution 1. In 1986, the price of oil on world markets dropped sharply. Since the United States is an oil – importing country, this was widely regarded as good for the U.S. Economy. Yet in Texas and Louisiana (oil-producing states), 1986 was a year of economic decline. Why?
Ans: Texas and Louisiana are both oil-producing states. A decrease in the price of oil will reduce output in these two states, hurting owners of capital and workers in the oil industry. While some capital will be able to migrate to other sectors . a significant fraction of capital is specific to the oil industry. By that same currency, some workers in the oil industry have skills that transfer to other sectors, and this transition will take time and is not cost less.