You are working during the sum
You are working during the summer in the natural gas richcountry of Kazakhstan as an intern in the Kazakh Institute ofEnergy Systems Analysis. In early 2018, the government realizedthat its policy of having a market price ceiling for natural gaswas leading to over-consumption and was hurting export revenues. Ittherefore decided to deregulate the natural gas industry. Beforethe step is taken, however, the minister of energy asks you topredict the impact on the local market. She is particularlyconcerned that the step not increase costs for the population toomuch or lower consumption too much. The information you use for theanalysis is provided below.
|
Elasticity of demand * |
-0.5 |
|
Average annual consumption of natural gas (in thousands of cubicmeters) ** |
500,000 |
|
2018 regulated price of natural gas (in tenge)*** |
25 |
|
Estimated market equilibrium price of natural gas (in tenge)**** |
35 |
* Using estimates from the US; ** FromMinistry of Energy reports; *** Tenge is the currency ofKazakhstan; **** Based on an average of prices worldwide
- Given these data, what is your estimate of the total quantityof natural gas demanded in Kazakhstan after deregulation? Pleaseshow all your work.
- How much will the monetary expenditures (in Tenge) on naturalgas by the population go up?
Answer:
a)
I shall use mid point approach in this case
Initial price=Po=$25
Revised price=P1=$35
Average price=P(Po+P1)/2=(25+35)/2=30
Percent change in price=(P1-Po)/P=(35-25)/30=33.3333%
Percent change in quantity demanded=Price elasticity ofdemand*Percent change in price=-0.5*33.3333%=16.6667%
So,
Initial quantity=Qo=500,000
Expected quantity=Q1=?
Average quantity=Q=(Qo+Q1)/2=(500000+Q1)/2
Percent change inquantity=(Q1-Qo)/Q=2*(500000-Q1)/(500000+Q)
We know percent change in quantity demanded=16.666667%
2*(500000-Q1)/(500000+Q1)=0.166667
1000000-2Q=83330+0.166667Q1
916670=2.1666667Q1
Q=(916670)/2.1666667=423079
Expected quantity afterderegulation=423,079
b)
Total expenditure in regulated prices=500000*25=12500000 inthousand tenge
Total expenditure in unregulated prices=423079*35=14807765 inthousand tenge
Increase in expenditure=14807765-12500000=2307765thousand tenge or say 2307.77 million tenge
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