Suppose that the world demand for oil is QD = 19 – 0.225P, where QD is in billio

Question

Suppose that the world demand for oil is QD = 19 – 0.225P, where QD is in billions of barrels per year demanded and P is the price per barrel in dollars. The world supply of oil without the production of the Organization of Petroleum Exporting Countries (OPEC) is QS = 6 + 0.15P, where QS is billions of barrels per year supplied and P is price per barrel in dollars. Suppose that OPEC produces 10 billion barrels per year regardless of price. a. What will be the world price of oil and the equilibrium quantity demanded and quantity supplied? The countries outside of OPEC will produce how much of the total quantity supplied? b. What would the equilibrium price, quantity supplied, and equilibrium quantity demanded without OPEC’s production?

Explanation / Answer

a) The diiference in world demand for oil and non-OPEC suply of oil will be served by oil produced by OPEC i.e. QD-QS=10 this implies 19 – 0.225P - 6-0.15P=10. Solving for P, we get the equilibrium price P as P=8.

At this price world demand of oil is QD=17.2

and equilibrium quantity supplied by non OPEC countries is 17.2-10=7.2

b) Without OPEC's production, equilibrium price and quantity will be determined by equating quantity demnaded and quantity supplied of oil.

QD=QS which implies 19 – 0.225P= 6 + 0.15P. Solving for P we get the equilibrium price P=34.67.

At this price equilibrium quantity supplied=equilibrium quantity demanded=11.2

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