Reference: Ref 15-3 (Table: Three-Country Oil Production) Refer to the table. Suppose that three countries are engaged in oil production. For simplicity, assume zero costs so that revenue equals profit. Assume that Country A cheats on the cartel agreement by producing 200 more barrels than the other two countries. What is the new quantity sold by Country A?
A) 900
B) 400
C) 1,400
D) 600

Question

Reference: Ref 15-3 (Table: Three-Country Oil Production) Refer to the table. Suppose that three countries are engaged in oil production. For simplicity, assume zero costs so that revenue equals profit. Assume that Country A cheats on the cartel agreement by producing 200 more barrels than the other two countries. What is the new quantity sold by Country A?
A) 900 
B) 400 
C) 1,400 
D) 600

Quizplus · Accepted Answer

Before the cheat, the total production of the cartel is 2,300 barrels (1,000 + 800 + 500). According to the cartel agreement, each country would produce 767 barrels (2,300/3) to maximize the total revenue. 
After Country A cheats, the other two countries would continue producing 767 barrels each, making a total production of 1,534 barrels. Country A would produce an additional 200 barrels, making its production 1,200 barrels. 
The new total production of the cartel would be 2,734 barrels (1,534 + 1,200), which is greater than the original total production. 
Since total revenue equals profit, the new production level is suboptimal, leading to a decrease in profit. 
The quantity sold by Country A would be 600 barrels (1,200 - 767).

Reference: Ref 15-3 (Table: Three-Country Oil Production) Refer to the Table