Assume that there are only two countries that produce crude oil, Saudi Arabia and Venezuela, that they produce the same grade of crude oil. First we…

Can you solve Number 2 (all parts a-d). And please show all work.

2.Assume that there are only two countries that produce crude oil, Saudi Arabiaand Venezuela, that they produce the same grade of crude oil. First we aregoing to pretend that there are “regulators” that force them to behave as if theywere perfectly competitive firms, and second, we are going to allow them tojoin OPEC, which is therefore a monopoly, and jointly maximize profits.Assume that the inverse demand curve for crude oil in the global market isgiven byP = 300 – 5QDwhere Q is measured in million barrels per day.Saudi Arabia is the low cost producer, with total cost function given byCSA(QSA) = 500 + 203AVenezuela’s cost function isCv (Qv ) = 800 + 403a.Assume that Saudi Arabia and Venezuela are the only two countries thatproduce crude oil in the world, and they are forced to behave competitivelydespite being a duopoly. Under this assumption, derive the market supplycurve for crude oil. (Hint: the market supply curve is the horizontal sum of theindividual firm supply curves since we are assuming the firms behavecompetitively. To sum the MC curves horizontally, solve each for each country’s Qas a function of its MC, then add up the Qs and solve for overall MC. See slide 20of Oil 1 sp19.pptx, which shows this graphically. This gives MC as a linearfunction of total Q, and then since MC is measure in money and so is P, we justreplace MC with P and we have a supply curve.)b.Again, assuming that regulators impose competitive behavior on theproduction and pricing of the two countries, what will be the price and totalquantity of crude oil produced? (don’t worry about allocating totalproduction between the two countries) Put a box or highlight over each answerso the TAs can find them in your work.C.Now assume that OPEC “gets teeth” and is able to set quotas that restrictproduction among its members. For simplicity, we will make the additionalassumption (which was once almost fairly realistic, but no longer is) thatbecause OPEC’s production costs are so low compared to other countries, it is amonopoly producer. OPEC therefore faces the demand curve given at thebeginning of the problem. OPEC will behave as a monopoly and face themarket demand curve, then it will allocate the total, joint production amongthe two countries so as to maximize joint profits. Find total crude oilproduction, the amount produced by each country, and the equilibriumprice (Please put a box, circle or highlight to indicate each of these threeanswers so that the TAs don’t have to search for your answers).d.Under the OPEC regime, does Venezuela produce crude oil in the short run? Inthe long run?

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