Table: Market for Oil Suppose that oil is produced by 10 countries, each of which produces 10 million barrels of oil a day (MBD) for a total 100 MBD. The world price of oil at this quantity is $36 per barrel so each country earns $360 million a day. Reference: Ref 15-2 (Table: Market for Oil) Refer to the table. Suppose that these countries form a cartel and each country produces 8 MBD. If one of the cartel members cheats by secretly pushing its production back to 10 MBD rather than 8, total revenue for the cheating country would:
A) increase from $360 million to $500 million a day.
B) increase from $400 million to $475 million a day.
C) decrease from $380 million to $360 million a day.
D) remain unchanged at $400 million a day.

Question

Table: Market for Oil Suppose that oil is produced by 10 countries, each of which produces 10 million barrels of oil a day (MBD) for a total 100 MBD. The world price of oil at this quantity is $36 per barrel so each country earns $360 million a day.  Reference: Ref 15-2 (Table: Market for Oil) Refer to the table. Suppose that these countries form a cartel and each country produces 8 MBD. If one of the cartel members cheats by secretly pushing its production back to 10 MBD rather than 8, total revenue for the cheating country would:
A) increase from $360 million to $500 million a day. 
B) increase from $400 million to $475 million a day. 
C) decrease from $380 million to $360 million a day. 
D) remain unchanged at $400 million a day.

Quizplus · Accepted Answer

If each country produces 8 MBD, the total production would be 80 MBD, and the world price of oil would increase to $40 per barrel. At this price, each country would earn $320 million a day. However, if one country cheats by producing 10 MBD, the total production would increase to 90 MBD, and the world price of oil would decrease to $36.11 per barrel. The cheating country would earn $450 million a day, which is an increase from $400 million a day (earned by producing 8 MBD). Therefore, the answer is B.

Table: Market for Oil Suppose That Oil Is Produced by 10