Consider Figure 14.3, which shows what a cartel can do if it can act as a monopolist.

In Figure 14.3, the cartel supplies the entire world market.

a. What is the effect on the cartel’s profit-maximizing price if a new outside source of supply now develops that can provide 10 million barrels of oil per day at any price above $5 per barrel? Show the effect using the graph. (Hint: With this new outside supply, what is the demand that remains for the cartel’s oil?)

b. Instead of the new outside source described in question a , consider instead a new outside source of supply that will provide amounts of oil that vary with the world price, according to the following schedule:

Outside supply (millions of barrels per day) 5 (World price 2 5)/2

(For instance, if the world price is $15, the outside supply is 5 million barrels per day.) Show graphically and explain the effect on the cartel’s profit-maximizing price of this new outside supply source.

Data From  Figure 14.3

Transcribed Image Text:

FIGURE 14.3 A Cartel as a Profit- Maximizing Monopoly Price ($ per barrel) 195 100 40 50 Maximum monopoly profits* Marginal-revenue curve B Marginal-cost curve (= supply curve if there is competition) F 0 30 49 Demand curve Oil exports (millions of barrels per day)