Question: When the price of oil was $95 per barrel, in the country of Wherever, 21,000 barrels of oil were produced per day. The elasticity of supply for oil producers in Wherever has been estimated to be 0.075. After a price change Wherever’s production increased to 21,750 barrels per day.

(a) Estimate the new price of oil.

(b) Suppose a severance tax that is imposed on oil production and the producer’s portion is $15 per barrel. What impact will this have on Whatever’s production? Start from the point of 21,750 barrels of production per day.

(c) Explain these production fluctuations.

(d) With the $15 tax, the government expects revenues of $322,500 per day. Is this a correct assessment? If yes, prove. If not, find the appropriate estimate and explain the discrepancy.