We calculated the gains and losses from price controls on natural gas and found that there was a deadweight loss of $5.68 billio
n. This calculation was based on a price of oil of $50 per barrel and utilized the following equations:
Supply: QS = 15.90 + 0.72PG + 0.05PO
Demand: QD = 0.02 – 1.8PG + 0.69PO
Where QS and QD are the quantities supplied and demanded, each measured in trillion cubic feet (Tcf), PG is the price of natural gas in dollars per thousand cubic feet ($/mcf), and PO is the price of oil in dollars per barrel ($/b).
If the price of oil were $70.00 per barrel, what would be the free-market price of gas?
With a $70.00 price of oil per barrel, the free market price of gas would be $11.48 per thousand cubic foot.
What would be the deadweight loss if the price of natural gas were regulated to be $4.00? The deadweight loss would be $___ billion. (Round answer to two decimal places)
Supply: QS = 15.90 + 0.72PG + 0.05PO
Demand: QD = 0.02 – 1.8PG + 0.69PO
Where QS and QD are the quantities supplied and demanded, each measured in trillion cubic feet (Tcf), PG is the price of natural gas in dollars per thousand cubic feet ($/mcf), and PO is the price of oil in dollars per barrel ($/b).
If the price of oil were $70.00 per barrel, what would be the free-market price of gas?
With a $70.00 price of oil per barrel, the free market price of gas would be $11.48 per thousand cubic foot.
What would be the deadweight loss if the price of natural gas were regulated to be $4.00? The deadweight loss would be $___ billion. (Round answer to two decimal places)
1 answer:
Answer:
Explanation:
1. If the price of oil were $70.00 per barrel, what would be the free-market price of gas?
The free-market price is defined by the equilibrium point: when the quantity demanded and the quantity supplied are equal.
QS = 15.90 + 0.72PG + 0.05PO
QD = 0.02 – 1.8PG + 0.69PO
15.90 + 0.72PG + 0.05(70.00) = 0.02 – 1.8PG + 0.69(70.00)
19.4 + 0.72 PG= 48.32-1.8PG
PG(0.72+1.8)=48.32-19.4
PG= 28.92/2.52
PG= $11.48
QS=QD= 15.90+0.72(11.48)+0.05(70.00)
QS=QD= 27.66
What would be the deadweight loss if the price of natural gas were regulated to be $4.00? The deadweight loss would be $___ billion. (Round answer to two decimal places)
If PG is $4.00
The quantity supplies will be less than the quantity demanded. The quantity supplied will be the quantity sold in the market.
QS= 15.90+0.72(4)+0.05(70.00)
QS= 22.28
To find the deadweight loss we must evaluate the quantity supplied in the demand curve:
22.28 = 0.02 – 1.8PG + 0.69(70.00)
1.8PG= 48.32-22.28
PG= 26.04/1.8
PG= 14.47
And now we calculate the area shown in the figure attached:
Base: 14.47-4= 10.47
Height: 27.66-22.28= 5.38
Deadweight loss: (10.47*5.38)/2
Deadweight loss: 28.1643
The deadweight loss would be $28.16 billion.
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The calculated present value of the annuity is $915,166.70.
Explanation and Solution:
Annuity is a collection of fixed payments made or earned either at the close or at the beginning of any term such that a significant initial payment or receipt may be turned into a set of comparatively minor payments or receipts. An annuity that lasts indefinitely is called perpetuity.
The formula for the present value of the annuity is given by:
Where;
R = annual payment = $75,000
i = interest rate = 5.25%
P = Present value of annuity
n = number of years = 20 years
P =
P = $915,166.70
Answer:
The project should be rejected as the payback period of 3.97 years exceeds the required 3 years. So, the correct option is E
Explanation:
The table showing the discounted cash flows of each year:
Computing discounted payback as:
Discounted Payback = Number of years + (Initial Cost - Discounted Cash flow of year 1 + Discounted Cash flow of year 2 + Discounted Cash flow of year 3 / Discounted Cash flow of year 4)
= 3 + ($120,000 - $0 - $28,925.62 - $41,322.31 / $51,226.01)
= 3 + ($49,752.07 / $51,226.01)
= 3 + 0.97
= 3.97
Working Note:
Discounted Cash Flow is computed as:
Discounted cash flow = Cash Flow / (1 + r) ^ n
where
r is rate of return that is 10%
n is number of year
So,
For 1st year:
= $0 / (1 + 0.1) ^1
= $0
For 2nd year:
= $35,000 / (1 + 0.1) ^ 2
= $35,000 / 1.21
= $28,925.61
For 3rd year:
= $55,000 / (1 + 0.1) ^ 3
= $55,000 / 1.331
= $41,322.31
For 4th year:
= $75,000 / (1 + 0.1) ^ 4
= $75,000 / 1.4641
= $51,226.01
