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Macroeconomics: Supply and Demand

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Q1) Explain how each of the following will affect the market for crude oil. Make sure you highlight whether supply or demand is affected and whether price will rise or fall. If possible illustrate each answer with a diagram.
Case 1. The government subsidizes the transition to vehicle powered natural gas.
Case 2. Job growth remains poor for several years.
Case 3. A new technology makes it cheaper and safer to explore deep sea bed reserves.

Q2) Explain the profit maximization condition of a business. What is normal versus supernormal profits? If a small business makes normal profits does it mean the owner does not get paid?

Q3) What are some reasons that would justify the intervention (regulation, taxation, etc) of government in the economy?

Q4) You are the CEO of a multinational corporation which wants to invest in India. What are some risks you will face? How would you mitigate them?

Q5) BONUS (optional) question for extra credit: What will be some of the consequences if Congress fails to raise the US debt ceiling?

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Solution Summary

Illustrates supply and demand economics using crude oil as a case study. Additionally introduces the concept of profit maximization, multinational risk mitigation (in India), and government intervention in macroeconomics. 1000 words, APA style with graphics and references.

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Q1) Explain how each of the following will affect the market for crude oil. Make sure you highlight whether supply or demand is affected and whether price will rise or fall. If possible illustrate each answer with a diagram.
Case 1. The government subsidizes the transition to vehicle powered natural gas.

Demand will be negatively affected by a government subsidy on natural gas powered vehicles. The time horizon of the effect on demand will depend on the specific subsidy?for example, if the subsidy is only on the purchase of the natural gas vehicle, then the effect will have a higher initial effect, but likely with lower growth over time. On the other hand, if the subsidy is on the natural gas fuel itself, then there will not be as much shock to oil demand initially, however the effect will grow over time.

Fuel Subsity?this will take some time to affect crude oil demand. If the subsidy is high enough to make gasoline more expensive than natural gas as a fuel, then ultimately demand will peak and actually begin to fall off for crude oil as a function of the availability of a cheaper, replacement product for gasoline in natural gas fuel.

Vehicle subsidy? initial demand will be greatly affected. As more consumers buy natural gas vehicles, the demand for gasoline will drop. However, if the subsidy is not great enough to offset life-of-vehicle fuel costs, then customers will not chose them for long. (See the current market for electric vehicles as an example).

If your study requires specific numbers, find them here: http://www.indexmundi.com/energy.aspx?country=us&product=oil&graph=consumption-growth-rate

Case 2. Job growth remains poor for several years.

Demand will be ...

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