Suppose Two Companies Own Adjacent Oil Fields

question 89

Multiple Choice

Suppose two companies own adjacent oil fields. Under the two fields is a common pool of oil worth $60 million. For each well that is drilled, the company that drills the well incurs a cost of $4 million. Each company can drill up to two wells. What is the likely outcome of this game if each company pursues its own self-interest?

• A)Each company drills one well and experiences a profit of $26 million.
• B)Each company drills one well and experiences a profit of $22 million.
• C)Each company drills two wells and experiences a profit of $22 million.
• D)One company drills two wells and experiences a profit of $32 million; the other company drills one well and experiences a profit of $16 million.

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Definitions:

Disposable Income

Money available to households for personal spending and saving after deducting their income taxes.

Income-Expenditure Framework

An economic model describing the relationship between an economy's total income and the spending levels that determines its equilibrium output.

Aggregate Expenditures

The total amount of spending in an economy, including consumption, investment, government spending, and net exports.

Real Gross Domestic Product

The total value of all goods and services produced within a country's borders in a specific time period, adjusted for inflation.