19.7 Suppose demand for crude oil is given by Q
2,000P 70,000, where Q is the quantity of oil in thousands of barrels per year and P is the dollar price per barrel. Suppose also that there are 1,000 identical small producers of crude oil, each with marginal costs given by MC
q 5, where q is the output of the typical firm.

a. Assuming each small oil producer acts as a price taker, calculate the market supply curve and the market equilibrium price and quantity.

b. Suppose a practically infinite supply of crude oil is discovered in New Jersey by a wouldbe price leader and can be produced at a constant average and marginal cost of $15 per barrel. Assuming the supply behavior of the competitive fringe described in part

(a) is not changed by this discovery, how much should the price leader produce in order to maximize profits? What price and quantity will now prevail in the market?

c. Graph your results. Does consumer surplus increase as a result of the New Jersey oil discovery? How does consumer surplus after the discovery compare to what would exist if the New Jersey oil were supplied competitively?