The following equations describe the supply and demand for crude oil in the United States in the mid-1980s: (Quantity supplied = "S") (Quantity demanded = "D") S = - 2 + (1/2) P S = 15 - (1/4) P Where price (P) is given in dollars and quantity in millions of barrels per day. The domestic equilibrium price is $22.67 per barrel with 9.3 million barrels traded per day. If the world price is below this equilibrium price, a domestic shortage will develop. We can deal with this shortage by purchasing crude oil from foreign suppliers. Determine the quantity of imports when the world price is $11.00 per barrel.

Answer: The equilibrium price is $68, Quantity 32 million barrel, The quantity to import is 53 million barrel

Explanation:

Given that D = - 2 + (1/2) P, S = 15 - (1/4) P

At equilibrium Qd = Qs

-2 + (1/2) P = 15 - (1/4) P

Change 1/2 P and 1/4 P to decimal we have 0.5, and 0.25 respectively

Collect like terms

-2 - 15 = 0.25P - 0.5P

17 = 0.25P

Divide both sides by P

17/0.25 = 0.25P / 0.25

68 = P

P = 68

Substitute the value of P into equation 1 and 2 determine the value of Q

-2 + 0.5 (68)

-2 + 34

= 32

15 - 0.25 (68)

15 + 17

= 32

To determine the quantity to import when world price is $11.00 per barrel, substitute the value into equation 1

-2 + 0.5 (11)

-2 + 55

= 53

Therefore quantity to import is 53 millions barrel