Student number: 210019644
Rahul Raina Question 1
a) On the basis of the graph, foreign oil was cheaper to produce than US oil.
b) If there had been no import quota, the US price would have been $1.75 dollars per barrel and
the US would have imported 2.1 billion of barrels per year.
c) With an oil import quota of 1 billion barrels per year, the US price would be $3 dollars per barrel
d) The annual loss to US consumers based on the oil import quota is 1.25 * 5.5 = 6.875 – (0.375) =
6.5 billion dollars.
e) The percentage reduction in total quantity supplied is 16.66%.
The Equilibrium price is found by holding Qs constant:
= $4 dollars per barrel
To calculate the quantity supplied:
Qs= 17+ 0.25 (4)
Qs= 18 barrels per year
Qs= 14+ 0.25(4)
Qs= 15 barrels per year
The percentage of reduction in total quantity supplied is:
Therefore the percentage reduction is 16.67%
f) Before curtailment, the price was $4 US per barrel of oil.
After curtailment, the price is $10 US per barrel of oil.
g) Before curtailment, the quantity of crude oil demanded and supplied was 18 billion barrels of
= 18 billion barrels of oil.
After curtailment, the quantity of crude demanded and supplied was 16.5 billion barrels of oil.
Qs= 14+ 0.25 (10) = 16.5 billion barrels of oil.
h) The price elasticity of demand is less in the short-run.
To calculate the point elasticity at the price at $10:
Therefore, the price elasticity of demand in the short-run is less than the price elasticity of
demand for crude oil as the short-run elasticity is 0.1515 and the long-run elasticity of demand
for crude oil is 0.4.
In a long run, you would expect that the OPEC’s output to have less of an effect on the price of
crude oil than in the short run because in the long run, the increase in the price of fuel will
result in consumers switching to fuel efficient vehicles and modifying lifestyles to reduce the
consumption of fuel. Question 2
BAC- ATC curves
50000 Plant Capital 4
Plant Capital 5
Plant Capital 6
0 50 100 Number of vehicles 250 300 350
They are evident in the graph
If the demand is expected to be