Question

Traditional oil drilling requires large fixed investments that deliver long-run returns. Fracking technology for shale oil extraction can work with much smaller investment and has quicker turnaround. Based on that, which of the following is true?

a. the elasticity of supply for fracking is lower than for traditional drilling

b.elasticity of supply for fracking is higher than for traditional drilling

c.elasticity of demand for fracking is lower than for traditional drilling

d.elasticity of demand for fracking is higher than for traditional drilling

Refer to the previous question (Question 5). Based on the facts given there, who will in the short run cut their production (Q) more when the price of oil falls?

a.traditional drilling companies

b.fracking companies

c.equally for the equal change in price

d.neither will cut any supply

Answer 1

It is given that the two methods of drilling are one is the traditional method and other is the method using fracking technology. The traditional method requires a large investment and returns are reaped in the long run. Whereas fracking technology required smaller investment and for return not to wait for a long duration as in the case of traditional technology.

Question1)

Thus, any change in the prices of oil, suppose prices of oil rises in such a case supply oil will increase by a greater percentage for fracking technology in comparison to traditional technology. This is because traditional drilling takes a longer time to reap the return, as it is mentioned that the benefits reaped in long-run. And it is known that a greater percentage change in quantity supplied due to one per cent change in price is more elastic the supply. Therefore, the supply is more elastic of fracking technology than the traditional drilling.

Thus, statement (b) is true and statement (a) is false.

If the price of oil changes then the demand for fracking technology changes by a greater percentage than that of traditional drilling technology. This is because the cost of investment is lower for fracking oil extraction. Thus, any change in prices greater change in demand for traditional drilling not possible as requires a huge investment. And it is known that when the percentage change in demand is greater due to one per cent change in price, then more elastic is the demand. Therefore, the demand is more elastic of fracking technology than the traditional drilling technology.

Thus, statement (d) is true and statement (c) is false.

Question 2)

When the price of oil will fall it is more possible for fracking drilling technology users to cut the production of oil and not for traditional drilling technology users because traditional drilling technology provides the long run return and not the short run. Therefore, to cut the production of oil in Short-run for traditional drilling technology users is difficult.

Thus, Option (b) is correct and the rest all are incorrect.