Scenario 17-2 Imagine that hwo oll cong any dills one well each sil get har of t

Question

Scenario 17-2 Imagine that hwo oll cong any dills one well each sil get har of the oil and earn a S20 milion peent S4 milion e:n enue X percent of the total revenue $4 milion in costs) Assume that having X percent of the total wells means that a company will collect a $16 milion c314 million O d $18 million QUESTION 37 Scenario 17-2 Imagine that two oil companies, Lexxon and PB own L adjacent oil fields. Under the fields is a common pool of oil worth $48 mition Driling a well to recover oil costs $4 million per company dtils one well each will get halir of the oil and eam a $20 million profit ($24 million in revenue-$4 milion in costs) Assume that having x percent of the total wells means that a company will collect X percent of the total revenue Refer to Scenario 17.2 PB's dominant strategy would lead to what sort of well dilling bohavion? a PB will dril a second well only if Lexxon does not drill a well Remaining Time: 1 hour, 52 minutes, 58 seconds. O c PB will always drill a second well UESTION 3s quantity b be equal to the monopoly quantity c be greater than the monopoly quantity

Explanation / Answer

36) a. $16 million

If each company drill two well , each company have to bear a cost of $8 million as they have to bear a cost of 4$ million separately for each well. Now the fixed revenue worth $48 million would get collected from four well. Now $24 million revenue of each firm will be divided into two as there are now two well. So, Lexxon now would get $12 million ($24/2) revenue from each well , and each well costs $4 million. so it would get profit of : $12-$4=$8 million from each well . and from two well it will get proft of $8*2 = $16 million

37) c.PB will always drill a second well

The dominant strategy of PB will always lead to drill another well, as PB will be better of by drilling another well in terms of profitability.

38) c. be greater than the monoploy quantity

to produce profit maximising output, the quantity of outputs produced by firms will always be greater than the monopoly quantity.

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