Question
Imagine, you have been appointed an advisor to a presidential campaign. Being an interested public policy researcher, you want to know what will happen to
Imagine, you have been appointed an advisor to a presidential campaign. Being an interested public
policy researcher, you want to know what will happen to oil prices during the course of the pandemic.
The demand for oil can be described by the following demand function QD = 1000 - P + I - 200S,
whereby QD is the quantity of oil demanded, P is the price, I is overall national income, and S
is the effect of the pandemic on consumer confidence. The supply of oil is given by the following
supply function QS = P + 2S, whereby P is the price.
1.Sketch the demand and supply curve graphically, and calculate the equilibrium price and equilibrium
quantities when there is no pandemic and S is set to 0 (i.e. S = 0) and the income equals 100 (i.e.
I = 100).
2.
Calculate the price elasticity of demand and supply, respectively and interpret your results briefly.
Explain how a 1% increase in the price impacts the demand for and supply of oil.
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