1. 2. Imagine that two cil companies, Big Petro Inc. and Gargantuan Gas, own adj

Question

1.

2.

Imagine that two cil companies, Big Petro Inc. and Gargantuan Gas, own adjacent oil fields. Under the fields is a common pool of oil worth $12 million. Drilling a well to recover oil costs $1 million per well. If each company drills one well, each will get half of the oil and earn a s5 million profit ($6 million in revenue minus s1 million in costs). Assume that having Xpercent of O A. Gargantuan Gas will drill a second well no matter what Big Petro Inc. does. B. Gargantuan Gas will not drill a second well under any circumstances ° 0 C. Gargantuan Gas will drill a second well only if Big Petro Inc. does not drill a well. D. Gargantuan Gas will drill a second well only if Big Petro Inc. drills a well.

Explanation / Answer

Question 1:

If Big Petro Inc.(BPI) does not drill a well, Gargantuan Gas(GG) will drill only one well spending 1 million dollars and make a profit of 11 million dollars. If both drill one well each, both make a profit of 5 million dollars each. But if BBI drills one well and GG drills two wells, GG will make a revenue of 8 million dollars and a profit of 6 million dollars. So option D is correct.

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