Consider the world market for oil, discussed in Example 29. Recall that the shor
ID: 1145530 • Letter: C
Question
Consider the world market for oil, discussed in Example 29. Recall that the short-run world oil demand equation is: the short-run total oil supply equation is: the initial equilibrium price is P*-$79.69 (dollars per barrel), and the initial equilibrium quantity is Q 32.01 billion barrels per year (bblyr). Q= 33.6-0.02P, Q= 31.05 + 0.012P Saudi Arabia is one of the world's largest oil producers, accounting for roughly 3 bblyr, which is nearly 10 percent of total world oil production. What would happen to the price of oil if, because of war or political upheaval, Saudi Arabia reduced oil production by 2.00 bblyr? As a result of this change in supply, the short-run equilibrium price of oil would T by SEnter your response rounded otwo dec ma places. .)Explanation / Answer
Currently the supply is Q = 31.05 + 0.012P. Now when the supply is reduced by 2.00 bb/yr, it implies the new supply is Qnew = 31.05 – 2.00 + 0.012P or Qnew = 29.05 + 0.012P. With the original demand being unchanged, the new short run price is
29.05 + 0.012P = 33.6 – 0.02P
4.55 = 0.032P
P* = 142.1875 or approximately $142.19. The new price will increase (greater than the old price) by $62.50.