Question
Consider Brockland, a medium-size nation that both produces and consumes oil and does not either export or import oil from other countries. As a result
Consider Brockland, a medium-size nation that both produces and consumes oil and does not either export or import oil from other countries.
As a result of Brockland's industrial policy, its oil extraction and refining sites (30 plants located in North, East, South-East, South, and Central regions of the country) are all separately owned and are highly competitive in the provision of oil to its consumers. The plant information is shown in the Excel document associated with this assignment. The document also provides the plant capacity (in thousands of barrels of oil per day); the marginal cost (MC) of extraction and refining; and indicates whether the extraction technology used is either conventional (typically, less expensive) or non-conventional (shale oil extraction, typically more expensive). You can also assume that the marginal cost (MC) of extraction and refining is constant for the purposes of your analysis throughout the productive capacity of the plant; and thus, MC is the same as the average variable cost (AVC).
The demand for oil in Brockland is relatively stable. The demand equation can be approximated by Qd = -20P + 2,200. Alternatively, equation as an inverse demand equation, P = -0.05Qd + 110.
Question 1
Using Excel, a graph that clearly shows demand and supply for oil in Brockland, and determine the equilibrium quantity and price.
Helpful Hints:
Use the marginal cost and quantity data to graph your supply curve, assuming that the individual plants will be willing and able to produce oil if the market price is at least equal to their marginal cost of extraction and refining. You can assume that the transportation costs are already included in the marginal cost figures.
You have enough information in the Excel table to determine the Quantity Demanded and Quantity Supplied that are required to create the two curves. In determining quantity supplied, it might be useful to sort your data by price (from lowest to highest) and with a formula for determining the quantity supplied at each increment of the marginal cost. For example, at a price of $10 (lowest marginal cost associated with Plant S1), only this plant will operate, and Qs will be equal to the plant's capacity of 120 (120,000 barrels per day). However, when price rises to $12, both Plant S1 and S10 will operate, producing Qs=120+120=240 units or 240,000 barrels per day).
Make sure that you appropriately label your axes and include legends for your curves. Please recall that your Q should be on the x-axis and your P should be on the y-axis, per standard convention in economics.
Insert the graph below (copy and paste from Excel). Please scale the graph as appropriate to show detail clearly.
What are the equilibrium quantity and price of oil in Brockland? How many plants operate to produce oil, and how many plants will shut down in the short run? Why? What types of plants primarily remain shut down, and why?
Question 2
Now, suppose that as population and incomes grow, demand for oil shifts, and can now be approximated by the demand function Qd = -20P + 3,300.
Using Excel, graph that clearly shows (new) demand and (unchanged) supply for oil in Brockland, and determine the equilibrium quantity and price.
Make sure that you appropriately label your axes and include legends for your curves. Please recall that your Q should be on the x-axis and your P should be on the y-axis, per standard convention in economics.
Insert the graph below (copy and paste from Excel). Please scale the graph as appropriate to show detail clearly.
What are the equilibrium quantity and price of oil in Brockland? As demand changed, how many plants will now operate to produce oil, and how many plants will remain shut down in the short run? Why?
Question 3
This question builds on Questions 1 and 2 and assumes that the demand curve is as described in Question 2, Qd = -20P + 3,300.
Additionally, due to a considerable improvement in the shale oil extraction technology, the shale oil plants (3 plants in the South-East, numbered SE1 through SE3; and 4 plants in the East, numbered E1 through E4) are able to reduce their respective marginal costs by 60% and increase capacity by 100% (double the capacity, essentially). For example, for Plant SE2, marginal cost was $32 with capacity of 50 (50 thousand barrels per day); now, these become an MC of $12.80 and capacity of 100 (100 thousand barrels per day).
Using Excel, a graph that clearly shows demand curve from Question 2 and the new supply for oil in Brockland, and determine the equilibrium quantity and price.
Make sure that you appropriately label your axes and include legends for your curves. Please recall that your Q should be on the x-axis and your P should be on the y-axis, per standard convention in economics.
Insert the graph below (copy and paste from Excel). Please scale the graph as appropriate to show detail clearly.
What are the equilibrium quantity and price of oil in Brockland? As supply changed, how many plants will now operate to produce oil, and how many plants will remain shut down in the short run? Why? What types of plants are primarily impacted by closures?
| Plant Identifier | Location | Extraction Type | Plant Capacity, '000 b/d | MC (Extraction/Refining), $/b | Qs (Quantity Supplied) | Qd (Quantity Demanded) |
| Plant C1 | Central | Conventional | 70 | $ 30.00 | ||
| Plant C2 | Central | Conventional | 80 | $ 35.00 | ||
| Plant C3 | Central | Conventional | 30 | $ 36.00 | ||
| Plant C4 | Central | Conventional | 90 | $ 31.00 | ||
| Plant C5 | Central | Conventional | 60 | $ 37.00 | ||
| Plant E1 | East | Shale | 60 | $ 52.00 | ||
| Plant E2 | East | Shale | 80 | $ 38.00 | ||
| Plant E3 | East | Shale | 90 | $ 40.00 | ||
| Plant E4 | East | Shale | 60 | $ 42.00 | ||
| Plant N1 | North | Conventional | 210 | $ 28.00 | ||
| Plant N2 | North | Conventional | 80 | $ 33.00 | ||
| Plant N3 | North | Conventional | 70 | $ 34.00 | ||
| Plant N4 | North | Conventional | 100 | $ 43.00 | ||
| Plant N5 | North | Conventional | 100 | $ 44.00 | ||
| Plant N6 | North | Conventional | 150 | $ 20.00 | ||
| Plant S1 | South | Conventional | 120 | $ 10.00 | ||
| Plant S10 | South | Conventional | 120 | $ 12.00 | ||
| Plant S11 | South | Conventional | 120 | $ 15.00 | ||
| Plant S12 | South | Conventional | 60 | $ 22.00 | ||
| Plant S2 | South | Conventional | 100 | $ 16.00 | ||
| Plant S3 | South | Conventional | 60 | $ 18.00 | ||
| Plant S4 | South | Conventional | 70 | $ 19.00 | ||
| Plant S5 | South | Conventional | 70 | $ 21.00 | ||
| Plant S6 | South | Conventional | 60 | $ 23.00 | ||
| Plant S7 | South | Conventional | 60 | $ 24.00 | ||
| Plant S8 | South | Conventional | 60 | $ 25.00 | ||
| Plant S9 | South | Conventional | 90 | $ 26.00 | ||
| Plant SE1 | South-East | Shale | 70 | $ 46.00 | ||
| Plant SE2 | South-East | Shale | 50 | $ 32.00 | ||
| Plant SE3 | South-East | Shale | 70 | $ 48.00 |
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Entrepreneurship
Authors: Andrew Zacharakis, William D Bygrave
5th Edition
1119563097, 9781119563099
