Suppose that the current price of oil is $60 per barrel and the quantity sold is

Question

Suppose that the current price of oil is $60 per barrel and the quantity sold is 90 million barrels per day. Assume that the supply and demand curves for oil are linear. The current estimates of the price elasticity of supply and demand in the U.S. are ? = 1 and e = -.2 respectively. Assume that the supply and demand curves for oil are linear. In other words, supply can be expressed as S(p) = a + bp, and demand as D(p) = e – fp.

a) Derive the intercept and slope of the supply curve, a and b

b) Derive the components of the demand curve, e and f

Explanation / Answer

A. the demand equation is Qd=108 - 0.3P B.the supply equation is Qs=1.5P C.Qd=Qs, 108-0.3P=1.5P P=108/1.8=60 D.Qd=108-18=90 Qs=1.5x60=90

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