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Introductory Economics, ECON1010

Submission deadline Thursday, 23 April 2020, 16:00

Instructions to students:

Answer questions as indicated on the Assignment sheet. All answers should be included in one document to be submitted via Moodle.

Enter your student ID and course code on your submission.

Ensure you save your document using your student ID and course code, e.g 7299019_ECON1010.

Upload only one document with your submission to the assessment upload section on the course Moodle page.

The assignment should be typed if possible.

You are required to answer all questions.

A word limit of 2000 words total is recommended.

Your answers must entirely be your own work. During the 7 day period that    this exam is active, you must not for any reason communicate or collude with other students taking this exam.  Note that your assessments may be processed through Turnitin for plagiarism checking.  We may also conduct a  further oral examination to check your knowledge and establish that the exam answers are your own.

This declaration incorporates the University’s Declaration of Originality which applies to all academic work (see below).

By submitting the assessment, you have agreed to both this declaration and the University’s Declaration of Originality.

Consider the following three models of crude oil market:

1.  Supply and demand curves for crude oil.

2.  Bargaining between one big producer and one big consumer.

3.  Game-theoretic model (with 2 by 2 game matrix) of a competition between two

big producers choosing quantities of oil extracted and sold .

Answer the following questions:

a.  Specify each of these three models in detail (but try to keep things reasonably  simple) and write down assumptions one needs to make in order to use each of them. Discuss the situations in which these models would be adequate. Explain the limitations of each approach.

b.  Suppose that the oil price suddenly drops sharply. Using the three models, provide a list of possible causes of the oil price drop. Which hypotheses are you going to test first? What variables (data) could help to test these hypotheses?

c.  Consider two countries, a dedicated oil producer (with economy significantly dependent on oil exports) and a big oil consumer (with economy significantly   dependent on oil imports). Suppose that the oil price drops sharply, but (for simplicity) the quantity of oil traded remains the same. What are the macroeconomic consequences for each of these countries? What type of stabilization policy each of these countries should adopt? Explain in detail how these policies work and what are their expected consequences.

To illustrate your ideas, you may use real life historic examples, however, this is not mandatory, as these questions are mostly about using economic models, not about history of oil crises.