Question

Instructions

In this activity, you will perform 2 quantitative static comparative analysis on a real life situation.

Static comparative analysis no. 1

It is the first quarter of 2014 and you work with a company involved in the production of electric batteries for vehicles. You lead a global project that will be profitable only if the international price of oil is higher than 60 USD per barrel. If the price of fossil fuels is high enough, electric vehicles will be compelling to consumers. If the price of fossil fuels is too low, consumers will prefer conventional vehicles and cheap gasoline instead of electric vehicles. The CEO of the company is concerned that the increase in the production of shale oil in the US may force the middle-east oil producers to increase their production in order to retain global market share, creating a disruption in the price of oil. She asks you to assess how large can be the international oil price variation in such scenario of larger oil supply. The current international oil market can be described by the following demand and supply equations for oil barrels:

Original equations to calculate the original equilibrium:    

Q^d = 205 - 0.05P      Q^s = -300 + 5P

Question 1.  Select and underline the demand and supply equations for the second market equilibrium. That is, the demand and supply equations after the hypothetical total increase in the supply of oil

1.      Q^d = 400 - 0.05P      Q^s = -300 + 5P
2.      Q^d = 205 - 0.05P      Q^s = -800 + 5P
3.      Q^d = 205 - 0.05P      Q^s = 104 + 5P

Question 2. Draw a market diagram showing the what will happen to the market equilibrium due to the hypothetical increase in oil supply.

(Draw or copy and paste your market diagram here. Only one market diagram)

Question 3. If the scenario sketched out by the CEO arises, ¿would your project be profitable? Why? Place your answer here

Static comparative analysis no. 2

You are going to remake the static comparative analysis no. 1, using a different original demand equation. Everything else will be the same.

Original equations to calculate the original equilibrium:    

Q^d = 2200 - 20P      Q^s = -300 + 5P

Question 4. Select and underline the demand and supply equations for the second market equilibrium. That is, the demand and supply equations after the hypothetical total increase in the supply of oil

1.      Qd=1800-20P      Qs=-300+5P
2.      Qd=2200-20P      Qs=104+5P
3.      Qd=2200-20P      Qs=-800+5P

Question 5. Draw a market diagram showing the what will happen to the market equilibrium due to the hypothetical increase in oil supply.

(Draw or copy and paste your market diagram here. Only one market diagram)

Answer 1

1) Before there was any increase in the supply of oil, the equation for demand and supply were:

Q^d = 205 - 0.05P

Q^s = -300 + 5P

At equilibrium, Qd= Qs

205 -0.05P = -300+5P

5.05P= 505

P= 100

The corresponding Q= 200

Thus, before there was any increase in the supply of oil, the equilibrium price was 100 and the quantity was 200.

An increase in the supply of oil would shift the supply curve in the oil market upwards. A upward shift in the supply curve in the oil market, would decrease the equilibrium price and would increase the equilibrium quantity of oil.

Let us check each of the equations in the options individually, so as to decide, which equation gives a higher quantity and lower prce than previous.

When, Q^d = 400 - 0.05P      Q^s = -300 + 5P

At equilibrium,

400- 0.05P= -300 +5P

5.05P = 700

P= 138.61

This gives a higher price than before, so this is not the correct option.

When,  Q^d = 205 - 0.05P      Q^s = 104 + 5P

At equilibrium,

205- 0.05P= 104+5P

5.05P= 101

P= 20

The corresponding Quantity= 204

This gives a lower price and higher quantity in the equilibrium, hence this is the correct option.

2)

When the market supply increases, the price in the market decreases, while the quantity increases.