Each well that is drilled produces both natural gas and oil. Based on current information, each MCF1 of gas can be sold for $4, while each STB2 of oil can be sold for $80. Due to labor and other constraints, as more wells are drilled, the production per well decreases. Specifically, when one well is drilled, 113629 MCF of gas and 56814 STB of oil per year can be extracted, but every well added reduces the output of each well by 500 MCF of gas and 125 STB of oil per year. Each well costs $1.5 million/ year, while the cost to lease the land is $180,000 per well per year. Each well site’s labor and other miscellaneous costs are $3 million/year. Finally, the fixed facilities costs are $1.25 million annually. 1. Construct the annual profit function 2. Find the number of wells which maximizes annual profit 3. Some of your team members are saying that the number of wells that maximizes profit is 8, but you know that this is incorrect. What did they do wrong?
Each well that is drilled produces both natural gas and oil. Based on current information, each MCF1 of gas can be sold for $4, while each STB2 of oil can be sold for $80. Due to labor and other constraints, as more wells are drilled, the production per well decreases. Specifically, when one well is drilled, 113629 MCF of gas and 56814 STB of oil per year can be extracted, but every well added reduces the output of each well by 500 MCF of gas and 125 STB of oil per year. Each well costs $1.5 million/ year, while the cost to lease the land is $180,000 per well per year. Each well site’s labor and other miscellaneous costs are $3 million/year. Finally, the fixed facilities costs are $1.25 million annually.
1. Construct the annual profit function
2. Find the number of wells which maximizes annual profit
3. Some of your team members are saying that the number of wells that maximizes profit is 8, but you know that this is incorrect. What did they do wrong?
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