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Lawrence of Arabia
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of the Gulag Archipelago
Apr 2001
time: 06:36
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LET:
U(x, y) = x^0.5 y^0.5
I = 100
Px= 1
Py= 1
Where U(x, y) is the equation for the indifference curve
Where I is income
Where Px is price of good x (oil)
Where Py is price of good y
WE CALCULATE:
Maximum utility:
X* = (a/ a+ b) * (I/ Px)
X* = (1/2) * (100/ 1)
X* = 50
Y* = (b/ a+ b) * (I/ Py)
Y* = (1/2) * (100/ 1)
Y* = 50
U* (x, y) = 50^0.5 50^0.5
U* = 50
When Px = 1, Py=1 and I= 100, we have optimal consumption at X* = 50 and Y*=50. This is point A on the graph. This lies along the indifference curve where U = 50
ASSUME:
Px increases by 100%
Px= 2
Py= 1
I= 100
WE CALCULATE:
Maximum Utility:
X** = (a/ a+ b) * (I/ Px)
X** = (1/2) * (100/ 2)
X** = 25
Y** = (b/ a+ b) * (I/ Py)
Y** = (1/2) * (100/ 1)
Y** = 50
U**(x, y) = 25^0.5 50^0.5 = 35.4
U** = 35.4
When Px = 2 and Py = 1, we have a new optimal consumption at X** = 25 and Y** = 50. This is point B on the graph. As you can see, when price of oil increases, you consume less of it. We also see that the consumer derives less utility, as it has decreased from 50 to 35.4.
WE CALCULATE:
Minimum Expenditures:
X*** = (VPy^0.5) / Px^0.5
X*** = 50/ 2^0.5
X*** = 35.4
Y*** = (VPx^0.5) / Py^0.5
Y*** = 50 2^0.5/ 1
Y*** = 70. 7
The minimized expenditure gives us point A’, which is where the consumer will buy 35.4 units of oil and 70.7 units of y. At A’, we have U* = 50, Px = 2 and Py = 1. V = indirect utility. In this case, it is U which we are holding constant at U = 50
Lets say the price goes to $2 for oil. The government decides to subsidize oil. The price of oil then falls to $1. The government pays $50 and the consumers pay $50.
Lets say the price goes to $2 for oil. The government decides to give the consumers cash. This increases their income, and they now buy at point A’, which gives them more of both goods then before. This costs the government just over $20.
It is cheaper to just give them the cash in this case.
 Attachment: slide1.jpg
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mrmitchell
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If oil consumption drops--you have to consider the entire range of jobs effected.
1) Rich middle eastern *******s
2) Poor middle eastern well workers
3) Rich American *******s
4) American well workers
5) Tankers + crew
6) Gas station operators
Consider the effect on the economies of Texas, South AR, and the other oil producing parts of the US (and Europe) when their product falls in demand. It isn't just a middle east problem.
And what happens when the ME is no longer economically worthwhile to keep screwing up? Do we just abandon those peoples to dictatorships and destruction like we have with other economically worthless areas? (Africa, for example)
And don't get me started about how much else oil is needed for. Plastics, chemicals...people talk about getting rid of the oil dependency but it is a hell of a lot easier thought up than risked. When we move away from gasoline cars we need to consider every angle to such a monumental economy ****.
EDIT; *shift
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03-06-2005 03:04
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