Reference no: EM13998525
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.
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
QUESTION:
Assume now that the demand curve shifts upward so that it starts at $40 but decreases at the same rate, i.e.
Price Quantity Demanded
$40 0
$39 5
$38 10
$37 15
Assuming the discount rate r=0.
How many barrels will be extracted in the first year? __________. In the second year? __________.
What will be the total marginal cost in the first year? __________ . In the second year? __________.
What will be the user cost in the first year? __________. In the second year? __________.
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