(Table: Demand for Crude Oil) Use Table: Demand for Crude Oil.Assume that the crude oil industry is a duopoly and the marginal and fixed costs of producing crude oil equal zero.Suppose that the two firms are maximizing industry profit and splitting the profit evenly.If both firms engage in noncooperative behavior,the industry output will be _ barrels,and the price of crude oil will be _.

A) 0;$160
B) 80;$80
C) 100;$60
D) 160;$0

Question

(Table: Demand for Crude Oil) Use Table: Demand for Crude Oil.Assume that the crude oil industry is a duopoly and the marginal and fixed costs of producing crude oil equal zero.Suppose that the two firms are maximizing industry profit and splitting the profit evenly.If both firms engage in noncooperative behavior,the industry output will be _____ barrels,and the price of crude oil will be _____.

A) 0;$160
B) 80;$80
C) 100;$60
D) 160;$0

Cammie Bateh · Accepted Answer

Final Answer : C, Explanation :  In a duopoly with zero marginal and fixed costs, each firm produces half of the total output that maximizes industry profit, which is at the quantity of 100 barrels (the midpoint of the demand curve). The price corresponding to this quantity is $60 per barrel, which is also the price at which each firm earns maximum profit. If both firms engage in noncooperative behavior, they will each produce more than half of the output (i.e., more than 50 barrels) in an attempt to capture more of the market share, which will result in lower prices and lower profits for both firms. Therefore, the industry output will not be zero or 160 barrels, and the price will not be $0 or $160 per barrel. Option C is the only choice that corresponds to the equilibrium outcome in a duopoly with noncooperative behavior.

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