Suppose that the total market demand for crude oil is given by
QD = 70,000 – 2,000P
Where QD is the quantity of oil in thousands of barrels per year and P is the dollar price per barrel. Suppose also that there are 1,000 identical small producers of crude oil, each with marginal costs given by
MC = q + 5
Where q is the output of the typical firm.
a. Assuming that each small oil producer acts as a price taker, calculate the typical firm's supply curve (q = .), the market supply curve (QS = .), and the market equilibrium price and quantity (where QD = QS).
b. Suppose a practically infinite source of crude oil is discovered in New Jersey by a would-be price leader and that this oil can be produced at a constant average and marginal cost of AC = MC = $15 per barrel. Assume also that the supply behavior of the competitive fringe described in part a is unchanged by this discovery. Calculate the demand curve facing the price leader.
c. Assuming that the price leader's marginal revenue curve is given by
MR = 25 – Q/1,500,
How much should the price leader produce in order to maximize profits? What price and quantity will now prevail in the market?