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-(Table: Demand for Crude Oil)Use Table: Demand for Crude Oil.Assume that the crude oil industry is a duopoly and the marginal cost of producing crude oil is zero.Suppose that the two firms are maximizing industry profit and splitting the profit evenly.If firm 1 decides to cheat and increase production by 10 more barrels,total industry output will be _____ barrels.
A)160
B)100
C)90
D)80

Question

Use the following to answer question: 
-(Table: Demand for Crude Oil)Use Table: Demand for Crude Oil.Assume that the crude oil industry is a duopoly and the marginal cost of producing crude oil is zero.Suppose that the two firms are maximizing industry profit and splitting the profit evenly.If firm 1 decides to cheat and increase production by 10 more barrels,total industry output will be _____ barrels.
A)160 
B)100 
C)90 
D)80

Quizplus · Accepted Answer

From the table, we can see that at a price of $10, the quantity demanded of crude oil is 100 barrels. If firm 1 increases production by 10 barrels, the new total industry output will be 90 barrels. At this output level, the price of crude oil will increase to $12 per barrel, as there is now a smaller quantity supplied at each price level.

If firm 1 cheats, their profit will increase by producing an extra 10 barrels of crude oil. However, this will result in a decrease in profit for firm 2, as they will now be producing less while the price of crude oil has decreased. Therefore, the best choice for both firms is to produce the optimal output level of 45 barrels each, resulting in a total industry output of 90 barrels.

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