Question

Where price is measured in dollars and quantity is measured in barrels. Assume the following: the total oil reserve is 120 tons, there are 2 periods, 11 years apart, mb and mc are the same in both periods.

a. Determine the equilibrium price in the first period.
b. Calculate the equilibrium quantity in the second period.
c. If there is an increase in total oil reserve to 150 tons, analyze the impact on equilibrium price and quantity in the first period.
d. Explain how a technological advancement affecting both mb and mc equally would influence the market dynamics.

Answer 1

Without specific supply and demand functions, the equilibrium price and quantity cannot be determined; historically, a supply shock in 1973 increased oil prices and reduced quantity. An increased oil reserve would likely lower prices and increase quantity. Technological advancements could decrease costs and also lead to lower prices and higher quantities.

Step-by-step explanation:

To address the theoretical problem posed by the student, we will rely on economic principles and the historical experience of oil markets, particularly the period around the 1973 OPEC oil embargo.

The equilibrium price is determined where the supply and demand curves intersect. However, with the given information, it's impossible to provide a specific price without additional data such as the demand and supply functions or the price and quantity at equilibrium. Historically, the 1973 oil crisis led to an increase in oil prices due to a supply shock.

Similarly, to calculate the equilibrium quantity in the second period, we would need the supply and demand functions, or details about changes in these functions between the two periods. Again, historical data from the 1973 oil crisis indicates a reduction in quantity due to higher prices from reduced supply.

An increase in the total oil reserve to 150 tons, assuming other factors remain constant, would likely lead to a rightward shift in the supply curve. This shift typically results in a lower equilibrium price and a higher equilibrium quantity in the first period.

Technological advancements that affect mb (marginal benefit) and mc (marginal cost) equally could improve efficiency. This might lead to a decrease in costs and thus shift the supply curve to the right, potentially reducing prices and increasing quantities if demand remains constant.

The historical example of the 1973 OPEC embargo shows that significant external factors can have a pronounced effect on market dynamics such as prices and consumption, as seen with the inelastic demand at the time causing prices to double, and later, more elastic demand resulting in a reduced impact on prices.