Question

4.The Bartlesville Oil Refinery converts crude oil to gasoline. It takes one barrel of crude oil to produce one barrel of gasoline. Total cost of producing q barrels of gasoline at the refinery isTC = ½ q2+ wq where w is the price of a barrel of crude oil. Marginal cost is therefore dTC/dq = q+w

a.Suppose the refinery can purchase 50 barrels of oil for $5 per barrel, but must pay $15 per barrel for any barrels it buys beyond 50 barrels. What is the marginal cost of producing a quantity of gasoline of less than or equal to 50 barrels? What is the marginal cost of producing a quantity of gasoline of more than 50 barrels?

b.Suppose the demand for gasoline facing the refinery is perfectly elastic at $30 per barrel. How much gasoline will the firm supply?

c.Suppose all barrels of oil cost $15, including the first 50. How would the refinery’s output change?

Answer 1

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