Suppose that the world price of oil is roughly $80.00 per barrel and that the wo

Question

Suppose that the world price of oil is roughly $80.00 per barrel and that the world demand and total world supply of oil equal 34 billion barrels per year (bblyr), with a competitive supply of 20 bblyr and 14 bblyr from OPEC. Statistical studies have shown that the long- run price elasticity of demand for oil is -0.40, and the long-run competitive price elasticity of supply is 0.40. Using this information, derive linear demand and competitive supply curves for oil. Let the demand curve be of the general form Q = a-bP and the competitive supply curve be of the general form Q= c+ dP where a, b, c, and d are constants. The equation for the long-run demand curve is 0 A. O B. ° C. OD, OE. Q-13.60-47.60P. Q-47.60 + 0.1 7P. Q = 47.60-P. Q-13.60-0.17P. Q-47.60-0.17P. The equation for the long-run competitive supply curve is OA· OB, OC, OD, OE, Q=12.00-0.10P. Q=12.00 + 0.10P. Q=12.00 + 47.60P. Q=8.00 +0.17P. Q=8.00 + 0.10P.

Explanation / Answer

1..)

Ed = dQ/dP *P/Q

-0.40 =dQ/dP*80/34

dQ/dP = -0.17

34 = a – 0.17(80)

A= 47.6

Q = 47.60 – 0.17P

Right answer is : (E)

2)

Es = dQ/dP * P/Q

0.40 = dQ/dP * 80 /20

dQ/dP = 0.1

20 = c +0.1(80)

C = 8

Q = 8 +0.10P

Right answer is (B)

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