Question

Consider the crude oil market in the mid- 1980 s in the United States. Equilibrium price was $22.67 per barrel with 9.33 million barrels consumed on a daily basis. If the world price is lower than the equilibrium price for a domestic nation (in this case, the United States), the possibility exists for foreign countries to export a product to the domestic nation. This is the case for crude oil. In this market, assume the world price of crude oil is $8 per barrel. Which of the following combinations of quantity supplied and quantity demanded would exist in the United States if the world price of crude oil is $8 per barrel as described above. A

. A quantity demanded of 13 and a quantity supplied of 13.
B. A quantity demanded of 13 and a quantity supplied of 2 .
C. A quantity demanded of 2 and a quantity supplied of 13 .
D. All of the above are possible when the world price is $8 per barrel. The amount of imports is million barrels per day. (Enter your response as a whole number.)

Answer 1

If the world price of crude oil drops to $8 per barrel, the U.S. quantity demanded would increase, and quantity supplied domestically would decrease. The exact quantities would depend on the elasticity of demand and supply in the U.S. market.

Step-by-step explanation:

When the world price of crude oil is lower than a country's domestic equilibrium price, it opens up the possibility for imports. Given the scenario where the United States has an equilibrium price of $22.67 per barrel with 9.33 million barrels consumed daily in the mid-1980s, and then faces a world price of $8 per barrel, we expect the U.S. to engage in importing oil.

The correct combination of quantity demanded and supplied in the United States, if the world price is indeed $8 per barrel, would be that the quantity demanded increases and the quantity supplied domestically decreases. However, the precise numbers for those quantities would depend on the domestic supply and demand sensitivities or elasticities.

Considering the historical data and patterns, such as the impact of the supply shock from the OPEC embargo, we can infer that initially, with inelastic demand, the domestic quantity supplied would decrease substantially while imports increase. Over time, as seen in the 1980s with more elastic demand due to conservation efforts, the quantity demanded might not rise drastically even at lower world prices, and the domestic quantity supplied might decrease less significantly.