Assume that the domestic supply curve for crude oil is S(P) = 5P and the domestic demand curve for crude oil is D(P) = 500 - 20P. Further assume that domestic oil refiners face a perfectly elastic supply of oil imports at a price of 16.
a) Derive the domestic price, the quantity processed by domestic oil refiners, and the amount of imports at the competitive equilibrium. Now suppose that domestic crude oil suppliers face a price ceiling of 8. Further suppose that for each two units of crude oil purchased, a domestic oil refiner gets one entitlement to domestic crude oil. Show the results on a well-labeled graph.
b) Derive the marginal price of crude oil faced by domestic oil refiners. Add this to the graph.
c) Derive the effect of regulation on the amount of crude oil processed by domestic oil refiners and the amount of imports. Show this on the graph.
d) Derive the welfare effect of regulation on U.S. consumers and producers. Shade in the welfare losses in the graph for part (a).