SEMESTER FALL 2022

ECONOMICS (ECO401)
ASSIGNMENT
MARKS: 15
DUE DATE: DECEMBER 02, 2022
The Case:

Pakistan is producing very limited percentage of oil to meet the overall demand of the
country. The indigenous oil production is constrained by technological, technical and
financial constraints. This necessitates import of crude oil and other oil products in large
quantities to meet significant share of the total demand. Latest data indicates that import
bill of oil increased by 95.9 per cent to US$17.03 billion during July-April FY2022.

Suppose the demand and supply equations of crude oil are given as follows:

Qs = 250 + 0.30P
Qd =340 - 0.10P

Requirement:
a) Find the equilibrium price and quantity of crude oil.
b) Find out the price elasticity of demand of crude oil at equilibrium price and
quantity.
c) If the government impose a tax of Rs. 25/litre and price become Rs. 250 per litre
than calculated the quantity demanded and quantity supplied at new price.

Marks: (5+5+5)
Solution:

Part (a):
Find the equilibrium quantity and price of crude oil.
Answer:
Qs = 250 + 0.30P
Qd =340 – 0.10P
For market clearing quantity and price, equalize Qd and Qs equations,
Qd = Qs
340 – 0.10P = 250 + 0.30P
340 – 250 = 0.30P + 0.10P
90 = 0.40P
90 = (40/100)P
P = (90*100)/40
P = 9000/40
P = 900/4
P = 225 (per litre)
Put price in Qd OR Qs equation, we get equilibrium quantity
Qd =340 – 0.10P
= 340 – 0.10(225)
= 340 – 22.5
Qd = 317.5 Litre
OR
Qs = 250 + 0.30P
= 250 + 0.30(225)
= 250 + 67.5
Qs = 317.5 Litre
Part (b):
Find out the price elasticity of demand at equilibrium price and quantity.
Answer:
Price elasticity of demand
Qd =340 – 0.10P
dQd/dP = -0.10
Equilibrium price and quantity found in part (a) is 225 and 317.5, respectively.
€d = (dQ/dP) × (P/Q)
= (-0.10) × (225/317.5)
= -0.10 × 0.709
€d = - 0.071
Part (c):
Answer:
Find the quantity demanded of crude oil after when price is 250.
As,
Qd =340 – 0.10P
If price is 250, than
Qd =340 – 0.10(250)
Qd =340 –25
Qd =315 Litre
Find the quantity supplied of crude oil after when price is 250.
As,
Qs = 250 + 0.30P
Qs = 250 + 0.30(250)
Qs = 250 + 75
Qs = 325 Litre

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