Reference: Ref 15-3 (Table: Three-Country Oil Production) Refer to the table. Suppose that three countries are engaged in oil production. For simplicity, assume zero costs so that revenue equals profit. Suppose that Country A cheats on the cartel agreement by producing 200 more barrels than the other two countries. What would Country B's reaction be?
A) lower its own quantity to 200 units
B) increase its own quantity to 1,600 units
C) increase the market price to $60
D) increase its own quantity to 600 units

Question

Reference: Ref 15-3 (Table: Three-Country Oil Production) Refer to the table. Suppose that three countries are engaged in oil production. For simplicity, assume zero costs so that revenue equals profit. Suppose that Country A cheats on the cartel agreement by producing 200 more barrels than the other two countries. What would Country B's reaction be?
A) lower its own quantity to 200 units 
B) increase its own quantity to 1,600 units 
C) increase the market price to $60 
D) increase its own quantity to 600 units

Quizplus · Accepted Answer

If Country A cheats by producing an extra 200 barrels, this will increase the total supply in the market, which will lead to a decrease in price. In order to maintain the cartel agreement and prevent prices from falling, Country B would need to increase its own quantity by 200 barrels as well. This would ensure that the total supply remains the same as before, and prices remain stable. Therefore, the best choice would be for Country B to increase its own quantity to 600 units, which is 200 more than its previous quantity of 400 units.

Reference: Ref 15-3 (Table: Three-Country Oil Production) Refer to the Table