Consider a competitive oil market where a producer faces costs to get the oil out of...

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Finance

Consider a competitive oil market where a producer faces coststo get the oil out of the ground. Suppose that it costs $10 dollarsper barrel to extract oil from the ground. Let ?? denote the priceof oil in period ? and let r be the interest rate. a. If a firmextracts a barrel of oil in period ?, how much profit does it earnthat period? b. If a firm extracts a barrel of oil in period ? + 1,how much profit does it earn in period ? + 1? c. What is thepresent value of the profits from extracting a barrel of oil inperiod ? + 1? What about period ?? d. If the firm is willing tosupply oil in each of the two periods, what must be true about therelation between the present value of profits from sale of a barrelof oil in the two periods? Express this in an equation. Explain howthis relates to the no-arbitrage condition.

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4.5 Ratings (741 Votes)

Part a Profit sale price cost price x 1 barrel Pt 10 Part b Profit Pt 1 10 Part c PV of profit in the year t 1 Pt 1 10 1 rt 1 PV of profit in year t Pt 10 1 rt Part d The See Answer

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