Trope Oil Company Is Considering Drilling an Exploratory Well

question 10

Multiple Choice

Trope Oil Company is considering drilling an exploratory well.The symbol P is the chance of a successful well,R is the revenue from a successful well,L is the price previously paid for the land,and C is the cost of drilling.The well will either be successful or dry.A company that is risk-neutral should drill if:

• A) PR > C.
• B) PR > C + L.
• C) P(R - C) > 0.
• D) P(R - C - L) > 0.
• E) P(R - C) > L.

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Definitions:

Substitute Goods

Products or services that can be used in place of each other. When the price of one falls, the demand for the other product falls; conversely, when the price of one product rises, the demand for the other product rises.

Cross Elasticity

A measure of how the quantity demanded of one good responds to a change in the price of another good, indicating the degree of substitutability or complementarity between them.

Percentage Change

A mathematical calculation that shows how much a quantity has increased or decreased in percentage terms over a specific period.

Cross Elasticity

An indicator of the sensitivity of demand for a product to fluctuations in the price of a different product.