(Table: Demand for Crude Oil) Look at the table Demand for Crude Oil.Assume that the crude oil industry is a duopoly and the marginal cost of producing crude oil equals zero.Suppose that the two firms are maximizing industry profit and splitting the profit evenly.If firm 1 decides to cheat and increase production by 10 more barrels, the price of crude oil will be:
A)$0.
B)$70.
C)$80.
D)$160.

Question

Quizplus · Accepted Answer

If firm 1 increases production by 10 more barrels, total industry production would be 30 barrels, causing the quantity demanded to decrease to 150. At a total production of 30 barrels, the equilibrium price would be $70, resulting in a total industry profit of $2,100, with Firm 1 earning $1,045 (70*15 - 10) and Firm 2 earning $1,055 (70*15 + 10). Thus, Firm 1's profit would increase from $1,035 to $1,045 by cheating, but this would decrease Firm 2's profit from $1,065 to $1,055. Therefore, Firm 1's best choice is to cheat and increase production by 10 more barrels, resulting in a new price of $70.

(Table: Demand for Crude Oil) Look at the Table Demand