Congratulations!You just won a million-barrel oil well!You are now trying to manage your asset.The previous owner pumped all the oil out of the well and put it into storage tanks; it will cost you nothing to sell it. With your well comes membership in the Good Resource Extraction and Sale Enterprise, an organization for well owners to exchange information, socialize, and get cheap drinks.Oil now sells for $15/barrel, and the interest rate is 1 percent/month.The Enterprise faces competition:The Synthetic Lubricant Industrial Manufacturing Effort (SLIME) says that it can make synthetic oil, every bit as good as your oil, from used plastics and leftover food, at a price of $20/barrel.Once SLIME gets going, there will be a perfect substitute for your oil.

a.Assuming that anyone who wants to can make synthetic oil through the Effort's process, and that we are in no danger of running out of either used plastic or leftover food, what will be the price trend of oil after the Effort comes into production?

b.As the owner of an oil well, are you concerned about this threat?How many months do you have until competition from this industry will knock you out of business, with the price trend you've predicted in part (a)?

c.How much oil will you wish to have on hand at the time the Effort goes into production?Will you speed up or slow down your sales of oil, relative to your sales plan before you knew about SLIME?

d.If all of the other oil producers use your strategy, what will happen to the current price of oil? [this question does not require a calculation]

e.If the current price of oil does as you say in (d), what will happen to the length of time period before the synthetic oil becomes economical?