Question

Solve for the market clearing price (P*), world oil production ( Q *w), fringe oil production...

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

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Homework Answers

Answer #1

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.

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