T-bone Pickens is a corporate raider. This means that he looks for companies that are not maximizing profits, buys them, and then tries to operate them at higher profits. T-bone is examining the financial records of two refineries that he might buy, the Shill Oil Company and the Golf Oil Company. Each of these companies buys oil and produces gasoline. During the time period covered by these records, the price of gasoline fluctuated significantly, while the cost of oil remained constant at $10 a barrel. For simplicity, we assume that oil is the only input to gasoline production.
Shill Oil produced 1 million barrels of gasoline using 1 million barrels of oil when the price of gasoline was $10 a barrel. When the price of gasoline was $20 a barrel, Shill produced 3 million barrels of gasoline using 4 million barrels of oil. Finally, when the price of gasoline was $40 a barrel, Shill used 10 million barrels of oil to produce 5 million barrels of gasoline.
Golf Oil (which is managed by Martin E. Lunch III) did exactly the same when the price of gasoline was $10 and $20, but when the price of gasoline hit $40, Golf produced 3.5 million barrels of gasoline using 8 million barrels of oil.
(a) Using black ink, plot Shill Oil’s is o profit lines and choices for the three different periods. Label them 10, 20, and 40. Using red ink draw Golf Oil’s is o profit line and production choice. Label it with a 40 in red ink.
(b) How much profits could Golf Oil have made when the price of gasoline was $40 a barrel if it had chosen to produce the same amount that it did when the price was $20 a barrel? $80 million. What profits did Golf actually make when the price of gasoline was $40?
(c) Is there any evidence that Shill Oil is not maximizing profits? Explain.
(d) Is there any evidence that Golf Oil is not maximizing profits? Explain.