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 each firm is permitted to drill two wells at most, the firms are in a Nash equilibrium when

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 each firm is permitted to drill two wells at most, the firms are in a Nash equilibrium when

Quizplus · Accepted Answer

Both firms have an incentive to drill two wells. If one firm drills two and the other drills one, the firm that drills two will earn more revenue. Therefore, neither firm has an incentive to deviate from drilling two wells, making it a Nash equilibrium.

Scenario 17-2. ​

Scenario 17-2.