5.(6 points) Suppose that you have been hired as an economic consultant by OPEC
ID: 1111189 • Letter: 5
Question
5.(6 points) Suppose that you have been hired as an economic consultant by OPEC and given the following schedule showing the world demand for oil 60 50 40 30 20 10 30 40 50 Your advice is needed on the following questions: a. If the price rises from $20 to $30 a barrel, will the total revenue from oil sales increase or decrease? b. What will happen to total revenue if the supply of oil is decreased further and the price rises to $40 a barrel? c. What is the pric d. What quantity of oil will be sold at the answer to (c)? e. What are the values of the price elasticity of demand for price changes of $10 a barrel at average prices of $15 and $45? f. What is the elasticity of demand that maximizes total revenue? g. Over what range of prices is the demand for oil inelastic? e that will achieve the highest total revenue?Explanation / Answer
(a) Total revenue (TR) = Price (P) x Quantity (Q)
When P = $20, Q = 50 million and TR ($ Million) = 20 x 50 = 1,000
When P = $30, Q = 40 million and TR ($ Million) = 30 x 40 = 1,200
Therefore revenue will increase.
(b)
When P = $40, Q = 30 million and TR ($ Million) = 30 x 40 = 1,200
Revenue remains unchanged.
(c)
Therefore, revenue is maximized (= $1,200 million) when Price is $30 and $40.
(d)
When Price = $30, Quantity = 40 million
When Price = $40, Quantity = 30 million
(e)
(i) When Average price = $15, Prices are $20 (Quantity = 50 million) and $30 (Quantity = 40 million).
Elasticity = (Change in Quantity / Average quantity) / (Change in price / Average price)
= [(40 - 50) / (40 + 50) / 2] / ($10 / $15)
= [- 10 / (90 / 2)] / (2/3)
= (- 10 / 45) / (2/3)
= - 0.33
(ii) When Average price = $45, Prices are $40 (Quantity = 30 million) and $50 (Quantity = 20 million).
Elasticity = (Change in Quantity / Average quantity) / (Change in price / Average price)
= [(20 - 30) / (20 + 30) / 2] / ($10 / $45)
= [- 10 / (50 / 2)] / (2/9)
= (- 10 / 25) / (2/3)
= - 0.6
NOTE: As per Chegg answering guideline, first 5 parts are answered.
P ($) Q (Million) TR ($ Million) 10 60 600 20 50 1000 30 40 1200 40 30 1200 50 20 1000Related Questions
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