Question

3. Would selling oil from the Arctic National wildlife refuge substantially affect oil price given that price elasticity of demand is -0.25, the price elasticity of supply of oil is 0.25, the pre-Arctic National Wildlife Refuge daily world production is 94 million barrels per day, the pre-Arctic National Wildlife Refuge world price is $50 per barrel, and daily Arctic National Wildlife Refuge production is 0.8 million barrels per day? Assume that the supply and demand curves are linear and the introduction of Arctic National Refuge oil would cause a parallel shift in the world supply curve to the right by 0.8 million barrels per day. (1.5 points)

This is a intermediate microeconomics question. Please help me to solve this problem and write all answers down. Thank you so much.

Answer 1

PED= -0.25 and PES= 0.25.
Initial Production = 94 million and additional prodcution= 0.8m.

Hence, (0.8/94) / (x/50) = 0.25, which yields x= -1.70. Hence, due to additional production, we see the price being dropped from $50 to $48.30, i.e. by $1.70

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