1. The U.S. produces oil, but does not produce enough to satisfy demand from con
ID: 1155719 • Letter: 1
Question
1. The U.S. produces oil, but does not produce enough to satisfy demand from consumers. There is a world price for oil where all participating countries can purchase crude oil for the same price. Since the U.S. refineries (consumers) can import oil at the world price and consume domestic oil, economists have developed models to help understand how the world market influences prices, the quantity produced domestically, and the quantity of oil that will be imported. There are also negative externalities associated with producing oil, whether domestically or internationally. Using this information present the following graphs: (4 points) For the case when negative externalities are not considered, draw the generic (be sure to label the graph completely, including the axes) a. i. domestic supply curve ii. domestic demand curve, and iii. the international supply (represented by the world price) curve. b. (2 points) Label the quantity supplied domestically and the quantity demanded domestically. c. (2 point) Identify the quantity of oil that will be importedExplanation / Answer
The figure one shows the domestic demand and domestic supply of the good. With no trade the domestic demand equals to domestic supply at the quantity Qe and the market price would be Pe. Now let the good can also be bought at the world market at the world price and let at the world price there is unlimited supply of the good. Thus, the world supply curve is a horizontal line. Now, at this price the domestic producers will be willing to supply Qsf and the domestic consumers will demand Qdf. As any quantity can be bought at the world price, the difference between domestic demand and supply that is the difference Qsf-Qdf will be imported by the country.
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