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miss 11

# miss 11 - _m 1 a I“-Hu-ﬂuu-h m n 1.” 4 In.” Whenthe...

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Unformatted text preview: ._..._.-..._.-._m.-_. 1.: ._.-. a. I“- -Hu-ﬂuu-h..- m...- _.--... n.- 1-..”... ...-. 4... In.” Whenthe elasticity ofdemand is equalto 1, a 1 percent increase inthe quantity brings a 1 percent decrease in the price. World oil production in 2% was approximately 35 million barrels a day, so an increase of 1 million barrels is an increase of 1.13 percent. This percentage increase in the quantity would lower the price by 1.13 percent. The Hotelling Primiple tells us that the price is expected to rise at a rate equal to the interest rate. Assuming an interest rate of2 percent a year, the price in 2333 is expected tn be 52 percent higher thanthe price 2121209. (2:22” = 1.52) Because the price is expected tn fall by 1.13 percent, today‘s price willfallby 11331.52, whichis 0.13 percent. 1fthe price in 2009 is \$133 a barrel, a 0.23 percent fall inthe price means the price will fall by approximately \$1. [Is-g the analysis above, but changing the interest rate to 4 percent a year, the discount factor is 222 instead of 1.52.1224” = 2.22). Assuming a price elasticity ofdemand no.1, the price is expected to fallby 11.3 percent, so todafs price falls by 11.31223, whichis 5.2 percent. When the interest rate is 2 percent a year, today‘s price falls by 1.3 percent. ...
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