Domestic Supply of Crude Oil in U.S = (P+44) / 7.2 Domestic Demand = 20 - 0.2P a

Question

Domestic Supply of Crude Oil in U.S = (P+44) / 7.2 Domestic Demand = 20 - 0.2P a) If there were no international trade in crude oil, what would be the equilibrium price and quantity of oil in the U.S.? Calculate and graph this equilibrium. b) Suppose the world price of crude oil is $15. What would be the equilibrium price and quantity under free trade? Find the price of oil, the total quantity traded, and the domestic quantity supplied. Assume you can treat foreign supply of oil as infinitely elastic (horizontal) at the world price. Calculate and add this to the graph from (a). c) Comparing the free trade equilibrium to the no-trade equilibrium, how much does consumer surplus change? How much does producer surplus change?

Explanation / Answer

a) Supply = (p+44)/7.2 Demand =20-0.2P At the equilibrium Supply= Demand (P+44) /7.2 = 20-0.2*P P+44 =144 -1.44P 2.44P =100 P=40.987 P =$41 Approax.(answer) Quantity = 20-0.20*41 = 11.8 (answer) b) At price,P =$15 Supply =(15+44)/7.2 =8.194 units (answer) demand = 20-0.20*15 =17 units (answer)

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