Scenario 17-2. Imagine that two oil companies, Mobile and Cargo, own adjacent oil fields. Under the fields is a common pool of oil worth $96 million. Drilling a well to recover oil costs $3 million per well. If each company drills one well, each will get half of the oil and earn a $45 million profit ($48 million in revenue - $3 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 Mobile and Cargo are able to successfully collude to maximize their joint profits,Mobile will

Question

Quizplus · Accepted Answer

If Mobile and Cargo collude to maximize their joint profits, they will both agree to drill one well each, as this will maximize their joint profits to $90 million ($45 million each) while minimizing their costs at $6 million ($3 million each). Any other combination of wells would result in higher costs and therefore lower joint profits.