Explore BrainMass

Explore BrainMass

    A competitive equilibrium

    Not what you're looking for? Search our solutions OR ask your own Custom question.

    This content was COPIED from BrainMass.com - View the original, and get the already-completed solution here!

    The Efficient Number of Firms
    Suppose the oil industry in some country is perfectly competitive and all firms
    extract oil from a common, and endless pool. The cost of operating a well is
    #1,000 for one year, and the firm can sell any amount it chooses at the world
    price of $10 a barrel.
    If N wells are operating, the output per year in barrels will be
    Q = 500N − N2
    and we assume symmetry, so the output per year for each firm is q = Q/N =
    500 − N. In what follows, ignore integer constraints.
    (a) A competitive equilibrium is a number of firms (wells) that will drill for oil
    such that the profits of each well from sales, net of production costs, equal
    to zero. Find the competitive equilibrium number of wells. Is there divergence
    between the private and the social marginal cost in the industry?
    (b) Suppose now that the government nationalizes the oil field. How many oil
    fields will it operate? How will output and output per well differ from (a)
    above?
    (c) As an alternative to nationalization, the government is considering an annual
    license fee to operate a well and discourage over-drilling. How much
    should this license be in order to achieve the optimal number of wells in a
    competitive equilibrium?

    © BrainMass Inc. brainmass.com March 4, 2021, 6:20 pm ad1c9bdddf
    https://brainmass.com/economics/demand-supply/a-competitive-equilibrium-40614

    Solution Preview

    Suppose the oil industry in some country is perfectly competitive and all firms extract oil from a common, and endless pool. The cost of operating a well is #1,000 for one year, and the firm can sell any amount it chooses at the world price of $10 a barrel.
    If N wells are operating, the output per year in barrels will be
    Q = 500N − N2
    and we assume symmetry, so the output per year for each firm is q = Q/N = 500 − N. In what follows, ignore integer constraints.
    (a) A competitive equilibrium is a number of firms (wells) that will drill for oil such that the profits of each well from sales, net of production costs, equal ...

    Solution Summary

    As an alternative to nationalization, the government is considering an annual
    license fee to operate a well and discourage over-drilling. How much
    should this license be in order to achieve the optimal number of wells in a
    competitive equilibrium?

    $2.49

    ADVERTISEMENT