The Organization of the Petroleum Exporting Countries (OPEC) isa group of oil producers that have entered into an agreement aimedat controlling the world supply of oil. They behave like amonopolist, seeking to maximize profits by restricting output andincreasing price. Suppose that the inverse demand curve for oilover the next five years is P = 165 ? 2.5Q, where Q is millions ofbarrels per day. OPEC’s marginal cost is $15/barrel, or C(Q) =15Q.
a. What is OPEC’s profit-maximizing level of output? What is theprice of oil?
b. Business consultants believe that maximizing short-run profitis counterproductive for OPEC in the long run. They suggest thathigh oil prices push consumers to conserve energy and find cheaperalternatives. High oil prices also lead to innovation and newcompetition that increases the overall supply of oil in the future.It is estimated that demand will stay the same if oil pricesstabilize at around $65/barrel or below, and if oil price exceeds$65/barrel then demand in the long run (over a second five-yearperiod) will decrease to P = 135 ? 2.5Q. Suggest what OPEC shoulddo if their goal is to maximize total profit over the next 10years.
