Suppose that the inverse demand and supply functions for nat

Suppose that the inverse demand and supply functions for natural gas are given by: P = 2 + Qs +0.1Po and P = 22 - Qd +0.1Po, where Qs and Qd are quantities of natural gas in billion cubic feet, P is the price of natural gas in USD/thousand cubic feet, and Po is the price of oil, equal to 80 USD/barrel. Oil and natural gas are:

Solution

Option a
The supply function can be rewritten as, Qs = P-2-0.1*Po. Here as the price of the oil increases the supply of natural gas decreases because of negative relation. Because of the increased price of oil, suppliers would switch over to produce more of oil so that they can earn more profits because of price rise. So production of one good decreases the production of the other acting as substitutes.