Scenario 17-2.Imagine that two oil companies,Lexxon and PB,own adjacent oil fields.Under the fields is a common pool of oil worth $48 million.Drilling a well to recover oil costs $4 million per well.If each company drills one well,each will get half of the oil and earn a $20 million profit ($24 million in revenue - $4 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.PB's dominant strategy would lead to what sort of well-drilling behavior?

Question

Quizplus · Accepted Answer

PB's dominant strategy is to always drill a second well because it maximizes its profit regardless of Lexxon's actions. By drilling a second well, PB can increase its share of the oil revenue, even though it incurs additional costs.