Solve for the market clearing price (P*), world oil production ( Q *w), fringe oil production (Q *f) and OPEC oil production (Q*o) when you have
World Oil Demand: Qw= 50- P/4
Marginal Cost to frind: MCf= 20+2Qf
Marginal Cost to Opec: MCo= 5 + 1.5 Qo
Fringe supply is given by P = 20 + 2Q or 2Q = P - 20. This gives Q = 0.5P - 10.
Residual demand = 50 - 0.25P - 0.5P + 10 = 60 - 0.75P
0.75P = 60 - Q
P = 60/0.75 - Q/0.75 or P = 80 - 4Q/3
Total revenue = PQ = 80Q - 4Q^2/3. MR = 80 - 8Q/3
MR = MC for dominant firm OPEC
80 - 8Q/3 = 5 + 1.5Q
75 = 25Q/6
This gives Q = 18 and so the price is P = 80 - 4*18/3 = $56. Fringe supply = 0.5*56 - 10 = 18 units.
We have market clearing price (P*) = $56, world oil production ( Q *w) = 36 units, fringe oil production (Q *f) = 18 units and OPEC oil production (Q*o) = 18 units.
Get Answers For Free
Most questions answered within 1 hours.