Consider the world market for oil, recall that the short-run world oil demand equation is:
Q = 33.6 – 0.02P,
the short-run total oil supply equation is:
Q = 31.05 + 0.012P.
the initial equilibrium price is P* = $79.69 (dollars per barrel), and the initial equilibrium quantity is Q* = 32.01 billion barrels per year (bb/yr).
Saudi Arabia is one of the world’s largest oil producers, accounting for roughly 3 bb/yr, which is nearly 10 percent of total world oil production. What would happen to the price of oil, because of war or political upheaval, Saudi Arabia reduced oil production by 1.50 bb/yr?
As a result of this change in supply, the short-run equilibrium price of oil would _____ by $ _____.
