In Example 9.1, we calculated the gains and losses from price controls on natura
ID: 1189098 • Letter: I
Question
In Example 9.1, we calculated the gains and losses from price controls on natural gas and found that there was a deadweight loss of $5.68 billion. This calculation was based on a price of oil of $50 per barrel and utilized the following equations: where 0s and QD are the quantities supplied and demanded, each measured in trillion cubic feet (Tcf): PG is the price of natural gas in dollars per thousand cubic feet ($/mcf), and PO is the price of oil in dollars per barrel ($/b). If the price of oil were $70.00 per barrel what would be the free-market price of gas? With a $70.00 price of oil per barrel, the free-market price of gas would be per thousand cubic foot. (Enter your response rounded to two decimal places.)Explanation / Answer
We have Po = 70,
Supply Qs = 15.90 +0.72Pg +0.05x70
=15.90+ 0.72Pg +3.5
= 19.40 +0.72Pg
Demand Qd = 0.02-1.8Pg +0.69x70
= 0.02 -1.8Pg +48.30
= 48.32-1.8Pg
At equilibrium, QD AND Qs will be equal:
Qd = Qs
48.32-1.8Pg = 19.40 +0.72Pg
1.8Pg +0.72Pg= 48.32-19.40
Pg = 28.92/2.52
= 11.48
Hence free market price of gas would be 11.48 per housand cubic foot.