Ghana is a producer and exporter of crude oil. Since Ghana is a relatively small crude-oil-producing country, its actions do not affect world prices; as an exporter, Ghana faces a foreign demand curve that is perfectly elastic at a price of $ 15 per barrel. The equation for the domestic demand curve is Qd = 26 – P, where price (P) is measured in dollars per barrel and quantity demanded (Qd) is measured in billions of barrels per year. The equation for the domestic supply curve is Q s = 10 + P, where quantity supplied (Q s) is measured in billions of barrels per year.
a. Assuming free trade, show graphically how much crude oil will be produced, consumed, and exported by Ghana.
b. Graphically, show the gains from trade. Explain who wins and who loses, and show by how much in terms of producer and consumer surplus. Does everyone in Ghana benefit from free trade? Explain why or why not. Is Ghana as a whole better off? Explain.
c. Suppose that the government of Ghana provides a $ 2 per-barrel subsidy for every barrel of crude oil from Ghana bought by foreigners. Graphically, show the effects of the subsidy on domestic production; domestic consumption; exports; and the welfare of producers, consumers, the government, and Ghana as a whole.

  • CreatedNovember 14, 2014
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