Suppose oil production in the Gulf of Mexico was a symmetric horizontal oligopoly in Cournot competition. Assume there are two producers, each with a constant marginal cost of production of $50 per barrel. Let the demand function for oil in the region be D(p) = 12000 – 20p, where demand is measured in barrels per day. (You will need to calculate inverse demand from demand before moving on).What would the perfectly competitive equilibrium price and quantity be? What would be the consumer surplus and producer surplus?Draw each firm’s residual inverse demand curve.Calculate the Cournot-Nash equilibrium price and quantity. What is the total consumer surplus, total producer surplus across the two firms, and deadweight loss?

Given demand function Q=12000-20P MC=$50

Answered: Suppose oil production in the Gulf of…

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter15: Imperfect Competition

Section: Chapter Questions

Problem 15.5P

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Suppose oil production in the Gulf of Mexico was a symmetric horizontal oligopoly in Cournot competition. Assume there are two producers, each with a constant marginal cost of production of $50 per barrel. Let the demand function for oil in the region be D(p) = 12000 – 20p, where demand is measured in barrels per day. (You will need to calculate inverse demand from demand before moving on).
1. What would the perfectly competitive equilibrium price and quantity be? What would be the consumer surplus and producer surplus?
2. Draw each firm’s residual inverse demand curve.
3. Calculate the Cournot-Nash equilibrium price and quantity. What is the total consumer surplus, total producer surplus across the two firms, and deadweight loss?

Definition Definition Consumer surplus is the consumers' gain from trade. The consumer surplus is the area below the demand curve but above the equilibrium price, up to the equilibrium quantity. Producer surplus is the producer's gain from trade. The producer surplus is the area above the supply curve but below the equilibrium price, up to the equilibrium quantity. Consumer surplus is represented by Area A and producer surplus is represented by Area B.

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