Suppose you have three producers of oil A, B, and C, with extractions costs of $

Question

Suppose you have three producers of oil A, B, and C, with extractions costs of $8, $10, and $12 per barrel of oil. Assume there are no user costs. Assume that each well can produce 100 barrels of oil per day. (numerical answers)

a) How much oil will be produced if the market price of oil is $9 per barrel?

b) How much oil will be produced if the market price of oil is $10 per barrel?

c) How much oil will be produced if the market price of oil is $11 per barrel?

d) At a price of $11 per barrel, how much total rent is collected by well A?

Explanation / Answer

If price of oil is $ 9 per barrel, then only producer A will enter the market as B and C are not able to cover their cost at this price and hence 100 barrels of oil will be produced.

If price of oil is $ 10 per barrel, then only producer A and B will enter the market as C is not able to cover their cost at this price and hence 200 barrels of oil will be produced.

If price of oil is $ 11 per barrel, then only producer A and B will enter the market as C is not able to cover their cost at this price and hence 200 barrels of oil will be produced.

Total rent = price - cost of extraction = 11-8 =$ 3 per barrel = 3*100 =300

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