Some hate it and some love it, but regardless of how you feel oil is still a key part of our daily lives. The average Canadian uses about 20 barrels of oil each year, equivalent to about one and a half swimming pools. Since it is such a major part of our expenses, oil is a product where, when price changes, we really notice.

In 2008, Chinas expansion sparked a long period of high prices. In this case study, we will analyze what has happened to these prices over time and the impact this has had on oil producers from the lens of producer theory.

To simplify our case study, lets assume that the oil market is perfect competition.

1- Consider the following producer theory model for a single firm producing oil, and the aggregate supply and demand. What is the firms equilibrium price and quantity?

Answer:

2- What is the firms profit at this level?

Answer:

(Please type the answers, Thank you)

S1 70 65 60 55 E1 A 45 40 Price/Barrel ($) MC 70 ATC 65 60 55 50 50 45 40 35 AVC 35 30 30 25 25 20 20 15 15 10 10 5 5 0 0 0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 Millions of Barrels/Day D 0 20 40 60 80 100 120 140 160 180 200 Millions of Barrels/Day