You still own the oil from Exercise 1, which has a price of $15/barrel, and the interest rate is 1 percent/month. The Enterprise now faces competition: The Synthetic Lubricant Industrial Manufacturing Effort says that it can make synthetic oil, every bit as good as your oil, from used plastics and leftover food, at a price of $20/barrel. Once the Effort gets going, there will be a perfect substitute for your oil.
(a) Assuming that anyone who wants to can make synthetic oil through the Effort's process, and that we are in no danger of running out of either used plastic or leftover food, what will be the price trend of oil after the Effort comes into production?
(b) Are you concerned about this threat? How long do you have until competition from this industry will knock you out of business, with the price trend you've predicted in part (a)?
(c) How much oil will you wish to have on hand at the time the Effort goes into production? Will you speed up or slow down your sales of oil, relative to your sales plan before you knew about the Effort?
(d) If everyone uses your strategy, what will happen to the current price of oil?
(e) If the current price of oil does as you say in (d), what will happen to the time period before the synthetic oil becomes economical?