Question

Scenario 17-2 Imagine that two oil companies, Big Petro Inc. and Gargantuan Gas, own adjacent oil fields. Under the fields is a common pool of oil worth $24 million. Drilling a well to recover oil costs $1 million per well. If each company drills one well, each will get half of the oil and earn a $11 million profit ($12 million in revenue minus $1 million in costs). Assume that having X percent of the total wells means that a company will collect X percent of the total revenue. Refer to Scenario 17-2. If Big Petro Inc. were to drill a second well, what would its profit be if Gargantuan Gas did not drill a second well? $14 million $15 million $16 million $17 million

Answer 1

Ans: $14 million

Explanation:

when Big petro Inc.drill second well and Gargantuan Gas did no drill second well, it means total number of well = 2 + 1 = 3

The percentage of total revenue collected by Big Petro Inc. = (2/3) * 24 million = $16 million

Total cost of drilling 2 wells = $2 million

Profit of Big Petro Inc. = $16 million - $2 million = $14 million