Question: You are told that the price elasticity of demand at the current equilibrium in the WTI crude oil market (P = $84 per barrel and Q = 252 million barrels per day¹) is equal to -2.

a) Derive a linear demand function satisfying the properties above. Illustrate this function on a graph with Q on the x-axis and P on the y-axis.

b) What is your estimate of the choke price?

c) What would have happened to your estimate of the slope and the choke price, had the demand been less elastic at the current equilibrium? Illustrate your answer on a graph.

d) Had the market demand been greater than 252 at the current P and with the same price elasticity of demand, what would have happened to your estimate of the slope of demand? Can you unambiguously predict the effect on the choke price? Illustrate your answer on a graph.