Question

In: Economics

In Example 9.1 LOADING... ​, we calculated the gains and losses from price controls on natural...

In Example 9.1 LOADING... ​, 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​ $50 per barrel and utilized the following​ equations: Supply​: QS ​= 15.90​ + 0.72PG ​+ 0.05PO Demand​: QD ​= 0.02minus−1.8PG ​+ 0.69PO where QS and QD are the quantities supplied and​ demanded, each measured in trillion cubic feet​ (Tcf), PG is the price of natural gas in dollars per thousand cubic feet​ ($/mcf), and PO is the price of oil in dollars per barrel​ ($/b). If the price of oil were ​$65.0065.00 per​ barrel, what would be the​ free-market price of​ gas? With a ​$65.0065.00 price of oil per​ barrel, the​ free-market price of gas would be ​$10.2110.21 per thousand cubic foot. ​(Enter your response rounded to two decimal places.​) How large a deadweight loss would result if the maximum allowable price of natural gas were ​$4.004.00 per thousand cubic​ feet? Deadweight loss if the price of natural gas were regulated to be ​$4.004.00 would be ​$ ??? billion. ​(Enter your response rounded to two decimal places.​)

Solutions

Expert Solution

QD = 0.02 - 1.8PG + 0.69PO

QS = 15.9 + 0.72PG + 0.05PO

(1) Plugging in PO = 65,

QD = 0.02 - 1.8PG + (0.69 x 65) = 0.02 - 1.8PG + 44.85 = 44.87 - 1.8PG

QS = 15.9 + 0.72PG + (0.05 x 65) = 15.9 + 0.72PG + 3.25 = 19.15 + 0.72PG

In equilibrium, QD = QS.

44.87 - 1.8PG = 19.15 + 0.72PG

2.52PG = 25.72

PG = $10.21

Q = 44.87 - (1.8 x 10.21) = 44.87 - 18.378 = 26.492

(2) When PG = 4 (assuming PO = 65),

QD = 44.87 - (1.8 x 4) = 44.87 - 7.2 = 37.67

QS = 19.15 + (0.72 x 4) = 19.15 + 2.88 = 22.03

Since consumers can buy only what producers will sell,

Market quantity = 22.03

When Q = 22.03, From demand function: 22.03 = 44.87 - 1.8PG, or 1.8PG = 22.84, or PG = 12.67 (Demand price)

When Q = 22.03, From supply function: 22.03 = 19.15 + 0.72PG, or 0.72PG = 2.88, or PG = 4 (Supply price)

Deadweight loss = (1/2) x (Demand price - Supply price) x Change in quantity

= (1/2) x $(12.67 - 4) x (26.492 - 22.03) = (1/2) x $8.67 x 4.462 = $19.34

Rahul Sunny answered 1 year ago
Next > < Previous

Related Solutions

The actuary for the pension plan of Ivanhoe Inc. calculated the following net gains and losses....
The actuary for the pension plan of Ivanhoe Inc. calculated the following net gains and losses. Incurred during the Year (Gain) or Loss 2020 $298,600 2021 482,900 2022 (208,800) 2023 (289,500) Other information about the company’s pension obligation and plan assets is as follows. As of January 1, Projected Benefit Obligation Plan Assets (market-related asset value) 2020 $4,014,600 $2,398,500 2021 4,504,200 2,220,600 2022 5,016,100 2,612,400 2023 4,230,600 3,051,500 Ivanhoe Inc. has a stable labor force of 400 employees who are...
The actuary for the pension plan of Oriole Inc. calculated the following net gains and losses....
The actuary for the pension plan of Oriole Inc. calculated the following net gains and losses. Incurred during the Year (Gain) or Loss 2020 $302,200 2021 476,600 2022 (210,400) 2023 (291,300) Other information about the company’s pension obligation and plan assets is as follows. As of January 1, Projected Benefit Obligation Plan Assets (market-related asset value) 2020 $4,029,300 $2,423,700 2021 4,515,400 2,180,800 2022 5,019,900 2,580,100 2023 4,255,600 3,067,900 Oriole Inc. has a stable labor force of 400 employees who are...
Explain how Gains and on disposal of assets losses are calculated and give numerical examples for...
Explain how Gains and on disposal of assets losses are calculated and give numerical examples for taxable gains and non-taxable gains. (DO NOT copy from the Law). . TAX AND ZAKAT IN SAUDI ARABIA THE LAWS AS FOLLOW: The gain or loss from the disposal of an asset is the difference between the compensation received and its cost base No gain or loss on disposal of a depreciable asset is taken into account other than what is stated in Article...
Explain how Gains and on disposal of assets losses are calculated and give numerical examples for...
Explain how Gains and on disposal of assets losses are calculated and give numerical examples for taxable gains and non-taxable gains ?
__________ is an investor's uncertainty about the economic gains or losses that will result from a...
__________ is an investor's uncertainty about the economic gains or losses that will result from a particular investment. Select one: a. Risk b. Revenue c. Return d. Reward Question 2 Not yet answered Points out of 1.00 Flag question Question text A key purpose of a vision and mission statement is to inform _________ what a firm is, what it seeks to accomplish, and who it seeks to serve. Select one: a. former employees b. regulators c. CEOs d. stakeholders...
1. If a taxpayer has gains and losses from an activity, are they better off classifying...
1. If a taxpayer has gains and losses from an activity, are they better off classifying the activity as a hobby or as a business? Explain why. Mr. D works full-time as a systems analyst for a consulting firm. In addition, he sells plants that he raises himself in a greenhouse attached to his residence. During the past 5 years, the results from raising and selling the plants have been as follows: Year Net Profit (Loss) from Scenario 1: Scenario...
How do we offset Capital gains and losses each year? Bracketing is a process for doing...
How do we offset Capital gains and losses each year? Bracketing is a process for doing this. What is included in the bracketing process? HINT: Long-Term Capital Gains/LTCG Long-Term Capital Losses/LTCL Short-Term Capital Gains/STCG Short-Term Capital Losses/STCL With the following information, do the bracketing as you explained above and determine what type of gain or loss you would have. Sold piece of investment land held for two years for a gain of$5,000 Sold stock in a company held for three...
Why are there usually redistributive gains and losses from trade opening? Give examples. If the United...
Why are there usually redistributive gains and losses from trade opening? Give examples. If the United States exports high-skilled labor goods and China exports low-skilled labor goods, how is this pattern of trade affecting inequality in the distribution of income in each of the two countries? 

A taxpayer has the following gains and losses from property transactions in the current year: $40,000...
A taxpayer has the following gains and losses from property transactions in the current year: $40,000 Section 1231 gain $25,000 Section 1231 loss $12,000 Long-term capital gain $9,000 Short-term capital loss. How are these transactions treated for tax purposes if the taxpayer recognized an $8,000 Section 1231 loss in the previous tax year? $18,000 long-term capital gain $15,000 Section 1231 gain; $3,000 short-term capital loss $8,000 ordinary income from look-back; $10,000 long-term capital gain $8,000 ordinary income from look-back; $7,000...
CASE 11‐5 Early Extinguishment of Debt Gains or losses from the early extinguishment of debt that...
CASE 11‐5 Early Extinguishment of Debt Gains or losses from the early extinguishment of debt that is refunded can theoretically be accounted for in three ways: Amortized over the life of old debt Amortized over the life of the new debt issue Recognized in the period of extinguishment Required: Discuss the supporting arguments for each of the three theoretical methods of accounting for gains and losses from the early extinguishment of debt. Which of the three methods would provide a...
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT