Demand for oil (d): Qd = 60 - P Domestic supply of oil (Sd): QS = -30 + 2P (a) Calculate the self-sufficiency or autarky solution (P3, QS3 = QD5, imports = 0) in the figure above. How much is TNB? Answer: Area of triangle EFH. Graph it. Hint: Set demand = Supply and solve for the equilibrium price and quantity. You need the vertical intercept for demand and for supply to calculate CNB and PNB or TNB. Can you graph it? TNB =EFH? (b) Suppose the world price is given at Sf0 = P0 = $8. Calculate the inefficient open market allocation (P0, QD5, imports = QD5 - QS1). . How much isTNB? Graph it. Hint: plug the world price into the supply and demand equations and calculate imports for this solution (c) Suppose the World price + VP is given at Sf1 = P1 = P0 + VP= $9. Calculate the Efficient allocation (with vulnerability premium) (P1, QD4, imports = QD4 - QS2). TNB? Graph it. Hint: plug the world price + VP into the supply and demand equations. How much is the TNB for this solution. Calculate the difference in TNB for this solution and the self-sufficiency solution = AHB= Inefficiency loss.
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Demand for oil (d): Qd = 60 - P
Domestic supply of oil (Sd): QS = -30 + 2P
(a) Calculate the self-sufficiency or autarky solution (P3, QS3 = QD5, imports = 0) in the figure above. How much is TNB? Answer: Area of triangle EFH. Graph it.
Hint: Set demand = Supply and solve for the
(b) Suppose the world price is given at Sf0 = P0 = $8. Calculate the inefficient open market allocation (P0, QD5, imports = QD5 - QS1). . How much isTNB? Graph it.
Hint: plug the world price into the
(c) Suppose the World price + VP is given at Sf1 = P1 = P0 + VP= $9. Calculate the Efficient allocation (with vulnerability premium) (P1, QD4, imports = QD4 - QS2). TNB? Graph it.
Hint: plug the world price + VP into the supply and demand equations. How much is the TNB for this solution. Calculate the difference in TNB for this solution and the self-sufficiency solution = AHB= Inefficiency loss.
(d) Calculate the post Embargo Allocation (domestic price P2, world price P0 and set QS1 = QD). Solve for the embargo domestic price P2. TNB? Graph it?
Hint: Plug the world price P0 into the domestic supply equation QS and calculate QS1. Then
Set the calculated QS1= QD = in the demand equation???.. and solve for P2 (the post embargo domestic price….
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