1. In 2012, the United States imported about 3.1 billion barrels of oil. Perhaps it would
be better for the United States if it could end the billions of dollars of payments to
foreigners by not importing this oil. After all, the United States can produce its own
oil (or other energy products that substitute for oil). If the United States stopped all
oil imports suddenly, it would be very disruptive. But perhaps the United States could
gain if it gradually restricted and then ended oil imports in an orderly transition. If we
allow time for adjustments by U.S. consumers and producers of oil, and we perhaps
are optimistic about how much adjustment is possible, then the following two equations show domestic demand and supply conditions in the United States:
Demand: P XXXXXXXXXX·Q D
Supply: P XXXXXXXXXX·Q S
where quantity Q is in billions of barrels per year and price P is in dollars per barrel.
a. With free trade and an international price of $100 per barrel, how much oil does
the United States produce domestically? How much does it consume? Show the
demand and supply curves on a graph and label these points. Indicate on the graph
the quantity of U.S. imports of oil.
b. If the United States stopped all imports of oil (in a way that allowed enough time for
orderly adjustments as shown by the equations), how much oil would be produced
in the United States? How much would be consumed? What would be the price of
oil in the United States with no oil imports? Show all of this on your graph.
c . If the United States stopped all oil imports, which group(s) in the United States would
gain? Which group(s) would lose? As appropriate, refer to your graph in your answer.
2. Country I has the usual demand and supply curves for Murky Way candy bars. Country II
has a typical demand curve, too, but it cannot produce Murky Way candy bars.
a. Use supply and demand curves for the domestic markets and for the international
market. Show in a set of graphs the free-trade equilibrium for Murky Way candy
bars. Indicate the equilibrium world price. How does this world price compare to
the no-trade price in Country I? Indicate how many Murky Ways are traded during
each time period with free international trade.
b. Show graphically and explain the effects of the shift from no trade to free trade on
surpluses in each country. Indicate the net national gain or loss from free trade for
each country.