Scenario 17-2.

Imagine that two oil companies, BQ and Exxoff, own adjacent oil fields. Under the fields is a common pool of oil worth $144 million. Drilling a well to recover oil costs $5 million per well. If each company drills one well, each will get half of the oil and earn a $67 million profit ($72 million in revenue - $5 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 BQ and Exxoff are able to successfully cooperate to maximize their joint profits, BQ will

Question

Scenario 17-2.
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Imagine that two oil companies, BQ and Exxoff, own adjacent oil fields. Under the fields is a common pool of oil worth $144 million. Drilling a well to recover oil costs $5 million per well. If each company drills one well, each will get half of the oil and earn a $67 million profit ($72 million in revenue - $5 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 BQ and Exxoff are able to successfully cooperate to maximize their joint profits, BQ will

Quizplus · Accepted Answer

If BQ and Exxoff cooperate, they will both choose to drill one well each. This is because each company's best response is to always drill one well, given that the other company is drilling one well. If one company deviates and drills two wells, they will only earn a profit of $62 million (2 wells = $144M revenue - $10M costs) while the other company earns $67 million. Therefore, cooperation leads to the highest joint profits of $134 million ($67M each).

Scenario 17-2. ​

Scenario 17-2.