Question 1: Consider modeling the world market for oil using the standard supply and demand model.
* a) In a diagram with barrels of oil on the horizontal axis and the price of a barrel (approx.159 liters) of oil on the vertical axis, depict the equilibrium in the world market for oil. Assume the initial equilibrium price is equal to $100 and the equilibrium quantity is q*. Identify the equilibrium point. 

* b) Suppose that due to technological progress many new oil producers in the US start operating and subsequently enter the world market for oil. Illustrate the effects on the equilibrium price and the equilibrium quantity of oil in a new diagram. Make sure to exhibit both equilibrium points, that is, before and after the entry new firms in the world oil market. 

* c) In what way does the equilibrium price response in part b) depend on the price elasticity of demand? 

* d) Suppose that in addition to the oil market shock in part b), China – the second largest economy in the world – experiences a significant slow down in economic growth. In a third diagram, illustrate the effect of both economic shocks on the equilibrium price and the equilibrium quantity of oil.
e) Can we be sure that the price of oil and the quantity of oil – taking both shocks into consideration – decreases or increases relative to the initial equilibrium which you illustrated in part a)?
Question 2: Suppose the price elasticity of demand for cigarettes is equal to 0.25. Assume that a pack of cigarettes currently costs 10 Dirhams. Assume also that the government wants to reduce tobacco consumption by 25%.
* a) By how much (in Dirhams) should the government increase the price of cigarettes? 

* b) Will the policy have a larger effect on smoking 1 year from now or 5 years from now? Explain. 

* c) Teenagers’ demand was found to be more price-elastic than adults’ demand. Why might that be? 

Question 3: Recently some GCC countries decided to introduce value added taxes. Consider the market for gasoline. Illustrate the effect of introducing a unit tax of 20 fils on the equilibrium price and the equilibrium quantity of gasoline in the supply and demand diagram. What is the effect on consumer surplus? What is the effect on producer surplus? What is the effect on the government’s surplus? Does total surplus in the market for gasoline decrease or increase? Who is likely to bear the larger share of the tax burden in the market for gasoline?
Question 4: You have the opportunity to run a mobile phone store in Dubai mall. It would cost you 3.7 million Dirhams per year to rent the location and buy the stock. You would also have to resign from your current job as a human resource assistant that pays you 0.15 million Dirhams per year.
* a) Define opportunity costs. 

* b) What would be your annual opportunity cost, if you ran the 
store? 

* c) Suppose that you expected to sell 3.8 million worth of 
merchandise, should you open the store?