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 were to drill a second well and Cargo also drilled a second well,what would Mobile's profit be?

Question

Quizplus · Accepted Answer

If each company drills two wells, the total cost of drilling will be $6 million for each company ($3 million per well x 2 wells). The total revenue will be $96 million ($48 million in revenue per well x 2 wells per company x 2 companies). If each company has 50% of the wells, Mobile will have 2 out of 4 wells (50%) and will earn 50% of the revenue, or $48 million. However, since Mobile spent $6 million to drill two wells, their profit will be $48 million - $6 million = $42 million.