Scenario 17-2.

Imagine that two oil companies, BQ and Exxoff, own adjacent oil fields. Under the fields is a common pool of oil worth $144 million. Drilling a well to recover oil costs $5 million per well. If each company drills one well, each will get half of the oil and earn a $67 million profit ($72 million in revenue - $5 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. Exxoff's dominant strategy would lead to what sort of well-drilling behavior?

Question

Scenario 17-2.
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Imagine that two oil companies, BQ and Exxoff, own adjacent oil fields. Under the fields is a common pool of oil worth $144 million. Drilling a well to recover oil costs $5 million per well. If each company drills one well, each will get half of the oil and earn a $67 million profit ($72 million in revenue - $5 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. Exxoff's dominant strategy would lead to what sort of well-drilling behavior?

Quizplus · Accepted Answer

Exxoff's dominant strategy is to always drill a second well because doing so increases its share of the oil revenue, regardless of BQ's actions.

Scenario 17-2. ​

Scenario 17-2.