3. Suppose that the world price of oil is $70 per barrel and that the US can buy

Question

3. Suppose that the world price of oil is $70 per barrel and that the US can buy all the oil it wants at this price. Suppose also that the demand and supply schedules for oil in the US are as follows:

Price $ per barrel US Quantity Demanded US Quantity Supplied

68 16 4

70 15 6

72 14 8

74 13 10

76 12 12

a. On graph paper, draw the supply and demand curves for the US. No graph needed, just explain.
b. With free trade in oil, what price will Americans pay for their oil: What quantity will Americans buy? How much of this will be supplied by Americans producers? How much will be imported? Illustrate total imports on your graph of the US oil market.
c. Suppose the US imposes a tax of $4 per barrel on imported oil. What quantity would Americans buy? How much of this would be supplied by American producers? How much would be imported? How much tax would the government collect?
d. Briefly summarize the impact of an oil import tax by explaining who is helped and who is hurt among the following groups: domestic oil consumers, domestic oil producers, foreign oil producers, and the US government.


4. Use the data in the preceding problem to answer the following questions. Now suppose
that the United States allows no oil imports.

a. What are the equilibrium price and quantity for oil in the United States?

b. If the United States imposed a price ceiling of $74 per barrel on the oil market and
prohibited imports, would there be an excess supply or an excess demand for oil.
If so, how much?

c. Under the price ceiling, quantity supplied and quantity demanded differ. Which of
the two will determine how much oil is purchased? Briefly explain

Explanation / Answer

#3

b. 70(price) 15 demand -6 domestic =9 imported

c. 74 (price) 13 demand- 10 domestic= 3 imported

d. This would hurt the consumers and the foreign suppliers. The government would get the tax money so it would help them and it would help the domestic suppliers with increased demand.

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