Question

Suppose that the demand side of the oil market consists of two consumers (think of them as

countries or sectors of an economy, such as transportation), with the following inverse
demand functions:

Consumer 1: P = 50 – 0.10Qd1
Consumer 2: P = 25 – 0.05Qd2

a. Determine the market demand function for oil.

b. Graph the market demand curve for oil.

c. If market price is $20, what is: (i) the quantity demanded in the market? (ii) the total
benefits from consumption? (iii) the consumer surplus?

Answer 1

The market demand function for oil is P = 75 – 0.10Qd1 – 0.05Qd2. The market demand curve for oil is downward sloping. If the market price is $20, the quantity demanded is ...

Step-by-step explanation:

a. To determine the market demand function for oil, we need to add up the individual demand functions of Consumer 1 and Consumer 2. This gives us:

P = (50 – 0.10Qd1) + (25 – 0.05Qd2)

Combining the terms and simplifying, we get:

P = 75 – 0.10Qd1 – 0.05Qd2

So, the market demand function for oil is P = 75 – 0.10Qd1 – 0.05Qd2.

b. To graph the market demand curve, we can plot different quantities on the x-axis and the corresponding prices on the y-axis. This will give us a downward sloping curve.

c. (i) If the market price is $20, we can substitute this value for P in the market demand function and solve for the quantity demanded. (ii) To calculate the total benefits from consumption, we multiply the quantity demanded at the market price by the price. (iii) To calculate the consumer surplus, we subtract the total benefits from consumption from the maximum amount consumers are willing to pay, which is the area under the demand curve up to the quantity demanded at the market price.