Microeconomics 6th Edition by Robert Hall, Shirley Kuiper, Marc Lieberman

Exercise 9

In the Using the Theory section of this chapter,we determined how much oil prices might rise if 9 million barrels per day in Persian Gulf oil became unavailable. The analysis used short-run price elasticities (0.06 for demand,and 0.03 for supply). In the long run,both elasticities should be larger. Suppose the long-run price elasticities are 0.3 for supply,and 0.4 for demand,and that 9 million barrels of Persian Gulf oil became unavailable- this time permanently. Starting at a price of $100 per barrel,and giving producers and consumers a few years to adjust,what would be the new price of oil?