Congratulations! You just won a million-barrel oil well! You are now trying to manage your asset. The previous owner pumped all the oil out of the well and put it into storage tanks; it will cost you nothing to sell it. Oil now sells for $15/barrel. Interest rates are 1% per month. With your well comes membership in the Good Resource Extraction and Sale Enterprise, an organization for well owners to exchange information, socialize, and get cheap drinks.
(a) At a party, Dr. Rig (head of the Enterprise) announces that oil prices will double next month. How much oil will you sell this month, before the price increase?
(b) Dr. Rig then announces that the price will also double the following month. How much oil will you sell next month, before the following month's price increase?
(c) Dr. Rig then says that in the fourth month (the current month is the first), oil prices will drop to $10/barrel and will stay that low for years. How much oil do you decide to sell in the third month, before the fourth month's price drop?
(d) What is that trend for prices?
(e) Given that trend, will the Enterprise as a whole sell more oil in the next month than in the current month, or less?
(f) How do you expect this price trend to affect the incentives for Enterprise members to explore for new oil deposits?