1A) Using the demand and supply equations listed below, estimate the equilibrium price in 2021 assuming...

1A) Using the demand and supply equations listed below, estimate the equilibrium price in 2021 assuming a 10% increase in the world demand for oil from 2011 to 2021 (that is, the demand curve shifts by 10 %), while the supply equation remained the same as in 2011. Let’s assume that the world demand for oil will have risen by about 10% from 2011 to 2021. (.... Show the relevant steps of your estimation, including formula(s) or equation(s) and values used in the estimation of the 2021 price...)

Demand equation: QD = 98.74 - 0.0807P

Supply equation: Qs = 77.8783+ 0.1068P

1B) Based on the estimated 2021 price in item A, compute the percentage change in oil price from 2011to 2021

1C) Assume again that demand will have increased by 10% from 2011 to 2021(as in item A above),but now consider the fact that oil supply has expanded significantly since 2011due to innovations in production technologies, large investments in new oil fields in the US, Canada, Russia, Brazil, etc., and increasing exports from previously embargoed countries (e.g., Iraq and Iran). To make it simpler, let’s say production capacity has expanded so that supply will have increased by 20 million (barrels per day) from 2011 to 2021(careful: it’s 20million, not 20thousand!). Estimate the new equilibrium price in 2021assuming this increase in supply together with the demand equation for 2021found in item A above

1D) Based on the estimated 2021price in item C, compute the percentage change in oil price from 2011to 2021

Expert Solution

a) In 2011,
QD = 98.74 - 0.0807P
Qs = 77.8783+ 0.1068P
98.74 - 0.0807P = 77.8783+ 0.1068P
20.8617 = 0.1875P
P = 111.2624

QD = 89.7611

The equation of demand in 2021
QD = 1.10 * ( 98.74 - 0.0807P ) = 108.614 - 0.08877P
Qs = 77.8783+ 0.1068P

Equating both sides, we get
30.7357 = 0.19557P
P = 157.16

QD = 108.614 - ( 0.08877 * 157.16 ) = 94.66

b) Price in 2011 from the above calculation is 111.26
Price in 2021 from the above calculation is 157.16

( 157.16 / 111.26 ) - 1 = 0.41 or 41%
The increase in price is 41% from 2011 to 2021.

c) There is no mention of measure in the original equation and so that the equations are assumed to be for per day and in millions.
QD in 2021 = 108.614 - 0.08877P
QS in 2021 = 20 + 77.8783+ 0.1068P
QS in 2021 = 97.8783 + 0.1068P

Again equating both sides,
108.614 - 0.08877P = 97.8783 + 0.1068P
10.7357 = 0.19557P
P = 54.8944

d) The price in 2011 was 111.2624
Price in 2021 is 54.8944
( 54.8944 / 111.2624 ) - 1 = -0.5066
= -50.66%

There has been a decrese in the price by 50.66%

Rahul Sunny answered 1 year ago

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