3. Assume a 5% discount rate. What is the net present value (NPV) of profits fro

Question

3. Assume a 5% discount rate. What is the net present value (NPV) of profits from 2a and 2b? Which is the better strategy?
Bold Area Below for reference for this question.

2. Assume that OPEC wishes to maximize profit over a 10 year period and planning is done in two five year periods, the SR period is years 1-5 and the LR period is years 6-10. Some economists believe that if OPEC maximizes SR profit (years 1-5) it will hurt OPEC profit in the long run (years 6-10). This is because high oil prices in the SR will force consumers to conserve and seek out alternatives to oil usage; thus causing LR demand to fall. These economists argue that at a world price of $50, demand will stabilize at Qd=57.5-0.5P.
a. Assume that OPEC adopts a short-run profit maximizing strategy. The SR (years 1-5) demand curve will be is Qd=57.5-0.5P (problem 1 above). If price exceeds $50 in the short-run then LR demand (years 6-10) will drop to Qd=42-0.4P (inverse demand P=105-2.5Q). Assume that cost remains MC=ATC=$15 per barrel. For a typical long-run year (years 6-10)
b. Assume that OPEC adopts a long-run profit strategy, and in both the short-run (years 1-5) and long-run (years 6-10) demand is Qd=57.5-0.5P in both periods. OPEC will charge $50 per barrel. Assume that cost remains MC=ATC=$15 per barrel. For a typical year, calculate the following (hint: OPEC is no longer using MC=MR pricing)


3. Assume a 5% discount rate. What is the net present value (NPV) of profits from 2a and 2b? Which is the better strategy?
Bold Area Below for reference for this question.

2. Assume that OPEC wishes to maximize profit over a 10 year period and planning is done in two five year periods, the SR period is years 1-5 and the LR period is years 6-10. Some economists believe that if OPEC maximizes SR profit (years 1-5) it will hurt OPEC profit in the long run (years 6-10). This is because high oil prices in the SR will force consumers to conserve and seek out alternatives to oil usage; thus causing LR demand to fall. These economists argue that at a world price of $50, demand will stabilize at Qd=57.5-0.5P.
a. Assume that OPEC adopts a short-run profit maximizing strategy. The SR (years 1-5) demand curve will be is Qd=57.5-0.5P (problem 1 above). If price exceeds $50 in the short-run then LR demand (years 6-10) will drop to Qd=42-0.4P (inverse demand P=105-2.5Q). Assume that cost remains MC=ATC=$15 per barrel. For a typical long-run year (years 6-10)
b. Assume that OPEC adopts a long-run profit strategy, and in both the short-run (years 1-5) and long-run (years 6-10) demand is Qd=57.5-0.5P in both periods. OPEC will charge $50 per barrel. Assume that cost remains MC=ATC=$15 per barrel. For a typical year, calculate the following (hint: OPEC is no longer using MC=MR pricing)


3. Assume a 5% discount rate. What is the net present value (NPV) of profits from 2a and 2b? Which is the better strategy?
3. Assume a 5% discount rate. What is the net present value (NPV) of profits from 2a and 2b? Which is the better strategy?
Bold Area Below for reference for this question.

2. Assume that OPEC wishes to maximize profit over a 10 year period and planning is done in two five year periods, the SR period is years 1-5 and the LR period is years 6-10. Some economists believe that if OPEC maximizes SR profit (years 1-5) it will hurt OPEC profit in the long run (years 6-10). This is because high oil prices in the SR will force consumers to conserve and seek out alternatives to oil usage; thus causing LR demand to fall. These economists argue that at a world price of $50, demand will stabilize at Qd=57.5-0.5P.
a. Assume that OPEC adopts a short-run profit maximizing strategy. The SR (years 1-5) demand curve will be is Qd=57.5-0.5P (problem 1 above). If price exceeds $50 in the short-run then LR demand (years 6-10) will drop to Qd=42-0.4P (inverse demand P=105-2.5Q). Assume that cost remains MC=ATC=$15 per barrel. For a typical long-run year (years 6-10)
b. Assume that OPEC adopts a long-run profit strategy, and in both the short-run (years 1-5) and long-run (years 6-10) demand is Qd=57.5-0.5P in both periods. OPEC will charge $50 per barrel. Assume that cost remains MC=ATC=$15 per barrel. For a typical year, calculate the following (hint: OPEC is no longer using MC=MR pricing)

Explanation / Answer

Solution

we know that

Profit=TR-TC
=1625-375
=1250
The profit OPEC earn is $1250

P=115-(2*25)

P=65
price OPEC charge is $65 per barrel

TC=ATC*Q
=15*25
=375
The total cost is $375

TR=P*Q

=25*65

=1625

The total revenue is $1625

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