(Table: Demand for Crude Oil) Look at the table Demand for Crude Oil.Assume that the crude oil industry is a duopoly and the marginal cost of producing crude oil equals zero.Suppose that the two firms are maximizing industry profit and splitting the profit evenly.If firm 1 decides to cheat and increase production by 10 more barrels, firm 1 will earn profits of:
A)$6,400.
B)$6,300.
C)$3,500.
D)$2,800.

Question

Quizplus · Accepted Answer

When firm 1 increases its production by 10 barrels, the total industry supply increases by 20 barrels (from 40 to 60) and the market price decreases from $200 to $175 per barrel. Firm 1's profit will increase by the additional revenue from 10 extra barrels sold at $175 per barrel, which is (10 x $175) - (10 x $40) = $1,350. However, firm 1's profit at the original equilibrium is $4,850, and if it cheats and raises production, firm 2 will also increase production to maintain its market share, leading to a new equilibrium where both firms earn profits of $3,500. Therefore, firm 1's profit from cheating is $3,500 + $1,350 = $4,850, which is less than its profit at the original equilibrium without cheating. Thus, the best choice for firm 1 is not to cheat and maintain the original equilibrium.

(Table: Demand for Crude Oil) Look at the Table Demand