Suppose that the world price of oil is 490 per barrel and that the US can buy al
ID: 1226795 • Letter: S
Question
Suppose that the world price of oil is 490 per barrel and that the US can buy all the oil it wants at this price. Suppose also that the demand and supply schedules for oil in the US are as follows:
Price ($ per barrel)
U.S. Quantity Demanded
U.S. Quantity Supplied
88
16
4
90
15
6
92
14
8
94
13
10
96
12
12
1) With free trade in oil, what price will Americans pay for their oil? What quantity will Americans buy? How much of this will be supplied by American producers? How much will be imported?
2) Briefly summarize the impact of an oil import tax by explaining who is helped and who is hurt among the following groups: domestic oil consumers, domestic oil producers, foreign oil producers, and the U.S. government.
3) Provide insight on the price elasticity of demand for oil in the U.S.
Please and thank you so much!
Price ($ per barrel)
U.S. Quantity Demanded
U.S. Quantity Supplied
88
16
4
90
15
6
92
14
8
94
13
10
96
12
12
Explanation / Answer
1. At price $90 per barrel quantity demanded(buy) is 15 units and quantity supplied at that price is 6 units. So, the amount of import = (15 - 6) = 9units.
2. If there is a import tax, it will hurt domestic oil consumers and foreign oil producers because it will rise the price of oil for both of them. But it helped domestic oil producers by restricting foreign producers. And due to import tax government will earn revenue, so U.S. government will also helped due to this tax.
3. From the table above we can see that as price of oil increases demand for oil decreases. So we can say that theprice elasticity of demand is elastic.
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