3. Suppose there are 2 oil services companies, American and National, operating

Question

3. Suppose there are 2 oil services companies, American and National, operating in an oil field in Northern Colorado. The following table shows how many wells each company can drill per year if the company only drills wells and how many storage tanks each company can build per year if the company only builds tanks Wells per year Tanks per year American National 24 12 4 Suppose that each company needs 2 storage tanks per year a. Determine how many wells and tanks each company can produce per year if they don't specialize and trade. b. Which company should specialize in each product? Explain. c. Determine how many wells and tanks each company can produce per year if they specialize and trade. What happens to total production? Propose terms of trade that will make both companies better off. That is, how many wells will be traded per tank or how many tanks per well? Explain. Using the terms of trade that you propose in part d, show the gains that each company receives from specialization and trade. d. e.

Explanation / Answer

a. If no specilaisation:

then Total number of wells: 24 American+12 National =36

Total number of tanks: 4 American+ 3 National =7

b. A company 'American' should focus on Wells and Company 'National' should focus on tanks as opportunity cost for American for wells is low.

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