Question

Assume a competitive market for oil. Low-cost producers can produce 2 million barrels at

$20 per barrel. Medium-cost producers can produce 10 million barrels at $30 per barrel.

High-cost producers can produce 10 million barrels at $40 per barrel. If demand is perfectly

inelastic at 5 million barrels, what is the equilibrium price of oil?

a) $40

b) $30

c) $25

d) $24

e) $20

Answer 1

In a competitive market, the price will be equal to ATC=MC. The for first 2 million barrels the market price is $$20 / barrel. For an additional 10 million barrels or total 12 million barrels the market price will be $30/ barrel. Similarly, for (2+10+10)=22 million barrels the market price will be $40/ barrel.

The market supply schedule is given in the table below

P	Q
20	2
30	12
40	22

Therefore, the market price of 5 million barrel will be $30 per barrel.

Therefore, the correct option is: (b)