1. 2. 3. Suppose that the long-run world demand and supply elasticities of crude oil are -0.906 and 0.515, respectively. The current long-run equilibrium price is $30 per barrel and the equilibrium quantity is 16.88 billion barrels per year. Derive the (linear) long-run demand and supply equations. (8 marks) Suppose the long-run supply curve you derived above consists of competitive supply plus the quantity of OPEC supply. If the long-run competitive supply (not including OPEC's production) is: Qs 7.78 +0.29p. What must be OPEC's level of production in this long- run equilibrium to maintain the price of $30? (2 marks) Reeds has the utility function U(F, H) 10F2H, where F is the quantity of food he consumes per year and H is the quantity of housing per week. Suppose the price of food is $10 and the price of housing is $5, while Joseph has an income of $150/week. a) Calculate Reeds' MRS as a function of the quantities F and H. (3 marks) b) Using a substitution method, solve for Reeds' optimal consumption bundle of food and housing. (5 marks) Show that, at the optimum, Reeds consumes the bundle along the budget constraint where MRS= Price Ratio. (2 marks) Consider the following short-run production function: q=5L () L. At what level of L do diminishing returns begin? At what level of L do diminishing marginal returns begin in the production process? (5 marks) 4. Ed's construction company has the following short-run cost function: q3 - 10q2 + 36q. a) What level of output will minimize the average cost? What is the AC at this point? (3 marks) Does the production process indicate diminishing returns? How can you tell? (2 marks)