Question

Consider the following cost structures for three oil producers: Fossils R Us Green House Oils Shale Ale Plant and property $900,000 $1,500,000 $1,000,000 Extraction costs (per barrel) $45 $31 $40 Capacity per day 100,000 barrels 140,000 barrels 80,000 barrels If the price for a barrel of oil is currently $42, what is the amount of barrels produced by these suppliers?

Answer 1

Answer:

220,000 barrels per day

Explanation:

                                  Fossils R Us      Green House Oils    Shale Ale

Plant and property      $900,000           $1,500,000         $1,000,000

Extraction costs                $45                        $31                      $40

(per barrel)

Capacity per day    100,000 barrels      140,000 barrels    80,000 barrels

In the short run, companies will continue to operate as long as the selling price is higher than the variable production costs, i.e. marginal revenue ≥ marginal costs. In this case, if the price of oil is $42 per barrel, only Green House Oils and Shale Ale will continue to operate since their production costs are lower than the selling price. Total production = 140,000 + 80,000 = 220,000 barrels