Principles of Economics (12th Edition)
12th Edition
ISBN: 9780134078779
Author: Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher: PEARSON
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Chapter 12, Problem 2.3P
To determine
Validating the statement on pareto-efficiency.
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Suppose that the world price of oil is roughly
$90.00 per barrel and that the world demand and
total world supply of oil equal 34 billion barrels per
year (bb/yr), with a competitive supply of 20 bb/yr
and 14 bb/yr from OPEC. Statistical studies have
shown that the long-run price elasticity of
demand for oil is -0.40, and the long-run
competitive price elasticity of supply is 0.40.
Using this information, derive linear demand and
competitive supply curves for oil.
Let the demand curve be of the general form
Q=a-bP
and the competitive supply curve be of the
general form
Q=c+dP,
where a, b, c, and d are constants.
The equation for the long-run demand curve is
A.Q=47.50-0.15P.
B.Q=13.50-47.50P.
C.Q=47.50-P.
D.Q=47.50+0.15P.
E.Q=13.50-0.15P.
Consider a hypothetical world consisting of only three countries: Hungary, Australia, and Italy. Each country produces grain. Hungary is a small
economy compared to Australia and Italy and thus cannot influence foreign prices.
On the following graph, the supply and demand schedules of Hungary are shown as Sun and Dun. Foreign supply schedules of grain are perfectly
elastic: Australia is a more efficient supplier of grain than Italy because its supply price is $1.00 per bushel (SAus), whereas Italy's supply price is
$2.00 per bushel (Sita).
PRICE (Dollars)
10.00
9.00
8.00
7.00
6.00
5.00
4.00
3.00
2.00
1.00
0
Hun
S +T
S₁ +T
S
S
+
0 3 6
A
Scenario
Free trade
With tariff
With customs union
m
SHu
12 15 18 21 24 27 30
GRAIN (Thousands of bushels)
Calculate the quantity of bushels Hungary imports when the three nations engage in free trade. Enter this value in the first row of the following table.
Also indicate which country Hungary imports from.
?
Imports
(Thousands of bushels) Imports…
In mid-2010, Saudi Arabia and Venezuela (both members of OPEC) produced an average of 8 million and 3 million barrels of oil a day, respectively. Production costs were about $20 per barrel, and the price of oil averaged $80 per barrel. Each country had the capacity to produce an extra 1 million barrels per day. At that time, it was estimated that each 1-million-barrel increase in supply would depress the average price of oil by $10. Consider the competition between Saudi Arabia and Venezuela as a game.
a) Construct the payoff table.
b) Do countries have a dominant strategy?
c) What actions should each country take and why?
Chapter 12 Solutions
Principles of Economics (12th Edition)
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