The following equation represents the daily market demand for crude oil. Q = 10,

Question

The following equation represents the daily market demand for crude oil.
Q = 10, 000,000 - 500,000 P
Suppose there are four oil producers in the crude oil market, A, B , C and D. The marginal cost of A is $10. The marginal cost of B is $12. The marginal cost of C is 13. The marginal cost of D is $15. Note that in all three cases MC =AVC.
(Hint: Do not be concerned about fixed costs in this problem; assume TFC = zero for all producers.)
a. If collusion is not allowed, what kind of market arrangement do you think is likely to result from competitive interactions among these four firms?
b. Now suppose collusion is allowed. Is it possible for these firms to form an effective cartel?
c. Calculate the profits of these firms in either case (a and b).

Explanation / Answer

a.) On account of immense demand it is evident that even a slightest difference in price will be of much significance. And the marginal cost of firms will be reflected in market price. Hence the market wil most likely be a oligopoly with most demand being met by producer A and B.

b) assume allfour form a cartel. Now definitely the prices have to be larger than D's marginal cost (only then will D will be capable of earning enough profit to lure A or B into cartel formation). But now the demand is distributed over all producers. This distrution reduces the overall revenue of A and B even though there is an increase in revenue per unit of oil. Hence A and B will definitely shy from forming a cartel.

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.