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Question One A

Economics

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Question One A. Something strange is happening on the world market for natural gas. News reporters have identified some factors causing the unexpected behavior of producers. First, it has been realized that the high prices for crude oil have stimulated production of crude oil, and this has increased the supply of natural gas as natural gas is usually found in the same well as crude oil. Second, natural gas wells also include sizable quantities of a valued chemical used to make plastics called ethane, and ethane prices are increasing. Third, energy suppliers recently started deploying a new, extremely productive technology for exploring and drilling for crude oil and natural gas known as hydraulic fracturing, or “fracking.”     With the aid diagram(s) carefully explain why the supply of natural gas keep increasing when natural gas prices are falling? (8 marks) B. Suppose that the general demand function for good X is   Qd =    60 - 2Px    +    0.01M + 7PR   where Qd = quantity of X demanded   Px = price of X M =    (average) consumer income   PR = price of a related good R   i. ii. iii. Is good X normal or inferior? Explain. (1 mark) Are goods X and R substitutes or complements? Explain. (1 mark) Suppose that M = ¢40,000 and PR = ¢20.   What is the demand function for good X?   (2 marks)   Suppose the supply function is   Qs = -600 + 10Px   iv. v. vi. vii. What are the equilibrium price and quantity?    (3 marks) What happens to equilibrium price and quantity if other things remain the same as in part (iv) but income increases to ¢52,000?    (3 marks) What happens to equilibrium price and quantity if other things remain the same as in part (iv) but the price of good R decreases to ¢14? (3 marks) What happens to equilibrium price and quantity if other things remain the same, income and the price of the related goods are at their original levels, and supply shifts to Qs = -360 + 10Px? (4 marks)