Suppose the world demand schedule for oil is as follows:
Price per barrelQuantity demanded
$50 ………………………………40
$75 ………………………………30
$125 ………………………………20
There are two oil producing countries, A and B. Each will produce either 10 or 20 barrels of oil. To keep things simple, assume they can produce this oil at zero cost.
a. There are four possible outcomes: A produces 10 or 20 and B produces 10 or 20. Find each country’s profit for each of these four possibilities.
b. Suppose these countries choose the quantity of oil to produce simultaneously and without consulting with one another. Show that each country will produce 20 barrels of oil and each will earn a profit of $1,000.
c. The oil ministers realize they can do better if they collude and agree that each will produce 10. How much profit will each country earn if each produces 10 instead of 20?
d. Will Country A have an incentive to cheat and produce 20 instead of 10? Will Country B have an incentive to cheat and produce 20 instead of 10?