Question

4. The oll cartel The Organization of Petroleum Exporting Countries (OPEC) is a group of 12 member countries that formed a cartel to sel petroleum on the world market. They support prices higher than would exist under more competitive conditions to maximize member nation profits and restrict competition among themselves via production quotas. Suppose that OPEC does not exist and that the 12 oil-producing nations compete in the world market, which is perfectly competitive. On the following graph, use the black point (plus symbol) to indicate the industry's free market profit-maximizing output. Note: Dashed drop lines will automatically extend to both axes. 8 8 Free Market Cartel PRICE (Dollars) Demand 1000 2000 300 4000 5000 6000 7000 8000 9000 10000 OIL (Barrels per day

Answer 1

a) Competitive Output will be at the point where P = MC, i.e., at Q = 6000.

b) If they form the cartel, they will produce the monopoly output and charge the monopoly price. Now, monopoly equilibrium occurs at the output level where MR = MC, i.e. at Q = 4500 and P = 60.

c) At q = 333, industry quantity, Q = n.q = (12)(333) = 3996

For Q = 3996, P = 60 (approx.)

Thus, each members’ profit: P.q – C.q = 3330 (approx.)

d) Let the competitive price be P^c. Now, the new profit of the supplier would be:

P^c.560 – (50)(560)

NOTE: I could not decipher the competitive price, P^c from your demand schedule, as the graph is not at all clear. Just check out P^c and set it accordingly in d) to get your result.