Question

Consider the market for petroleum in a country. The supply and demand functions for petroleum in the country is given by the equations below. D() = 24 – 2P (1) S(p) = 4p (2) a) What is the equilibrium price and output in the market? (2) b) Draw a graphical representation of the market and show the equi- librium levels of price and output. Point out the consumer and producer surpluses on the graph. Calculate the consumer surplus. (2) c) Assume that the government decides to reduce the supply for petroleum by half to limit pollution. What are the new equilibrium and price levels? What is the new consumer surplus? (2) d) What would happen if the government instead placed a tax on the purchase of petroleum that costs 3 per unit (t = 3). What is the new consumer price? (2) e) Which outcome would consumers prefer (e) or (a)? What about the society at large? Verbally motivate your answer. (2)

Answer 1