Sam owns an oil field with a number of producing wells.In the past,he has started and stopped production of these wells as the price of oil fluctuated over time.Assume the government imposes additional requirements on non-producing wells that are still production capable.These requirements are expected to increase the cost of stopping well production by 30 percent.As a result,Sam should be: A)keeping all wells open continuously. B)closing wells only if he plans to keep them closed permanently. C)willing to keep wells operating at a lower level of profitability than he has in the past. D)increasing the cost of capital he applies to his well evaluation analysis. E)opening wells at a lower p_open price.

Question

Quizplus · Accepted Answer

The additional requirements imposed by the government on non-producing wells that are still production capable, which increase the cost of stopping well production by 30 percent, make it more expensive to stop and then restart production. Therefore, Sam should be more inclined to keep wells operating even if they are less profitable than before, to avoid the increased costs associated with stopping and restarting production.

Sam Owns an Oil Field with a Number of Producing