Figure: Four-Country Oil Production Total Market Output (barrels of oil) Market
ID: 2495770 • Letter: F
Question
Figure: Four-Country Oil Production
Total Market Output (barrels of oil) Market Price ($) Profit ($)
400 80
600 70
800 60
1,000 50
1,200 40
1,400 30
1,600 20
6. Refer to the table above. Suppose that four countries are engaged in oil production. Assume zero costs.
a. If the four countries create a cartel and agree to mimic monopoly-like behavior, what level of output would each individual firm produce? What is each firm’s profit? (2 pts.)
b. Assume that Country A cheats on the cartel agreement by producing 200 more barrels than the other three countries.
i. What is the new market price when Country A cheats? (1 pt.)
ii. What is the new profit earned by Country A? What profit does each of the other three countries make? (2 pts.)
Explanation / Answer
Following is the complete table -
(a) According to TR-TC approach, a monopoly would produce that level of output at which difference between total revenue and total cost that is profit is at its maximum.
As above table shows, difference between TR and TC that is profit is at its maximum when 1,000 barrels of oil is produced.
So, cartel behaving as monopolist will produce 1,000 barrels of oil.
We assume that production of each country is equal.
So, each country will produce (1,000/4) 250 barrels of oil.
It is provided that cost of producing oil is zero.
Above table shows that market price is $50 per barrel when 1,000 barrels are produced.
Calculate each country's profit -
Profit = (Production by a country * Market price) - Cost
= (250 barrels * $50 per barrel) - $0
= $12,500 - $0
= $12,500
Each country's profit is $12,500.
(b)
(i) Before cheating by country A, cartel is producing 1,000 barrels of oil. If country A cheats on the cartel agreement by producing 200 more barrels of oil than other three countries then total production will become 1,200 barrels of oil. When output reach 1,200 barrels of oil, market price becomes $40 per barrel.
Thus, the new market price when country A cheats is $40 per barrel.
(ii) Before cheating by firm A, each country is producing 250 barrels of oil.
Now, only country A has increased its production by 200 barrels while all other countries are still producing the same level of output that is 250 barrels of oil.
New production of country A is 450 barrels of oil.
Calculate new profit of country A -
New profit = (New production * New market price) - Cost
New profit = (450 barrels * $40 per barrel) - $0
= $18,000 - $0
= $18,000
The new profit earned by country A is $18,000.
Calculate profit earned by each of the other three countries -
Profit = (production * new market price) - cost
= (250 barrels * $40 per barrel) - $0
= $10,000 - $0
= $10,000
The each of the other three countries will make a profit of $10,000 due to cheating by country A.
Total market output Market price TR TC Profit (TR - TC 400 80 32,000 0 32,000 600 70 42,000 0 42,000 800 60 48,000 0 48,000 1,000 50 50,000 0 50,000 1,200 40 48,000 0 48,000 1,400 30 42,000 0 42,000 1,600 20 32,000 0 32,000Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.