Question

1. P = 100 – 2 Q, where P is price and Q is barrels of oil. Total quantity is 60 barrels. MC = $20 r = 0.1 Assume the oil company has to use up its oil within one year In order to maximize profit, a) How many barrels should the oil company produce today (t0) and how many should they produce one year from now (t1)? b) What price should they charge in each period? c) How much profit will they earn in each period, and in total? d) Suppose they produce 15 barrels today and one year from now. What profit will they earn and is it higher or lower than your answer in c)? e) If the interest rate increases above 10%, will they produce more barrels in period 0 (and fewer in period 1) than in part a)? Provide an intuitive explanation for your answer

Answer 1

Now, given r = 0.1, P = -20 , t = 1

Therefore, Amount = P (1 + r/100)^t

= -20 ( 1 + 0.1/100)¹ = - 18.999 = - 19

Therefore, in order to maximize profit oil company face loss of 19.