Sub: Economics Topic: MicroEconomics
Question:
From an economic and technical standpoint, there is an optimal rate at which to extract oil
from an oil field. In the mid 90’s. Mobil was producing 60,000 barrels of oil per day (bpd) and
shell was producing 75,000 bpd from adjacent fields in CA.
ClassOf1 provides exert guidance for College, Graduate and High school homework and live online tutoring on subjects like
Finance, Marketing, Statistics, Economics and others. Check out more solved problems in our Solution Library.
(a) What are the externalities between the oil productions of the two oil companies?
(b) If the 2 companies negotiate an agreement, should they aim to increase or reduce
production?
(c) Assess the likelihood that the externality would be resolved.
Solution:
a) Here technology is acting as externality. Due to good technology the shell was produced more barrels
compared to Mobil.
b) If the two companies aim is to increase the production, the market supply of oil will increase. This
increasing market supply will lead to decrease the price. So they will try to reduce the production to
earn higher profit.
c) Impact of new technology the shell is producing more barrels compared to Mobil. This will cause to
increase the market supply. The price of the oil will come down because of this increasing supply. So
profit will also go down. Better to negotiate both companies to increase their profit with reducing their
output level with minimizing the cost.
** End of the Solution **
ClassOf1 provides exert guidance for College, Graduate and High school homework and live online tutoring on subjects like
Finance, Marketing, Statistics, Economics and others. Check out more solved problems in our Solution Library.
www.classof1.com
*The Homework solutions from ClassOf1 are intended to help the student understand the approach to solving the problem and not for submitting
the same in lieu of your academic submissions for grades.