Question

A country imports 3 billion barrels of crude oil per year and domestically produces another
3 billion barrels of crude oil per year. The world price of crude oil is $90 per barrel. Assuming linear schedules, economist estimate the price elasticity of domestic supply (Es)
=0.25 and the price elasticity of domestic demand (Ed) to be 0.1 at the current equilibrium. Suppose now there is an imposition of a $30 per barrel import fee on crude oil that would
involve annual administrative costs of $250million. Assume that the world price will not change as a result of the country imposing the import fee, but that the domestic price will
increase by $30 per barrel.
i) Determine the quantity consumed, quantity produced domestically and quantity imported
after the imposition of the import fee.

Answer 1

If there is an imposition of a $30 per barrel import fee on crude oil, then the quantity consumed will decrease, quantity produced domestically will increase and quantity imported will decrease after the imposition of the import fee.