Supply and Demand Graph
To complete this assignment, address the following requests:
1. Based on the information from the US Energy Information Administration, create the supply and demand graph in the space below. This information is helpful for the client to know how much oil to produce.
2. Also identify the price and quantity at which equilibrium exists. This information is important for the client to determine the quantity of oil to produce for profit maximization. Identify this information on the supply and demand graph you created below.
3. Finally, determine if the oil and gas industry is in perfect competition, an oligopoly, or a monopoly. You may need to examine additional information on competition production and pricing decisions, monopoly production and pricing decisions, and price discrimination to answer this question. This information will help the client to determine pricing strategies. It might be helpful to know how many publicly traded companies exist globally. You might also want to read about how crude oil is priced.
4. Over the past 12 months, what has been the price range of regular unleaded gasoline, natural gas, and two or three types of crude oil? Traders and speculators can buy oil contracts for future delivery. Does this make the market perfect competition? (To answer this question, you may need to visit www.OilPrice.com, the American Petroleum Institute website, or the US Energy Information Administration website.)
Profit Maximization
Cal Overhaut operates an ExxonMobil gas station franchise in Fitzhugh, MD. The price of gasoline is volatile and varies greatly from day to day. The price per gallon varies based on the seasonal blend of gasoline, which is determined by clean-air requirements, and Cal's pricing choices are limited to the profit margin for his price.
He recently raised the price of gas by 1 cent per gallon, and his profit declined. Cal would like you to measure his business gains or losses based on the price of $2.779 per gallon.
Cal competes with a local brand on the opposite corner that typically sells gas for 4 to 5 cents per gallon less than his station. They are currently selling gasoline for $2.769 per gallon. Recently, regular gasoline for delivery in New York harbor sold for $2.074 per gallon.
To the right are additional charges that Cal must pay on each gallon of gasoline:
1. Cal sold 3,600 gallons per day at a price of $2.769 per gallon. He raised the price 1 cent to $2.779 per gallon, and revenues and profits dropped. His station sold 3,200 gallons per day at $2.779 per gallon.
What is the price elasticity of demand? Can the elasticity be characterized as elastic, inelastic, or neither? What does this mean and why does it matter? Will revenues increase or decrease as a result of the price cut? By how much? Cal tells you that his fixed costs are $50 per day. By how much did profits decline? (Profits are revenues minus all costs.)
2. After seeing your analysis of his decline in profit, Cal decides to lower the price of gas to $2.759 per gallon. After this change, the volume sold increased to 4,000 gallons per day. He asks you to measure his business gains or losses at $2.759.
What is the price elasticity of demand? Can the elasticity be characterized as elastic, inelastic, or neither? What does this mean and why does it matter? Will revenues increase or decrease as a result of the price cut? By how much? Cal tells you that his fixed costs are $50 per day. By how much did profits increase or decline? (Profits are revenue minus all costs.)
3. After seeing the result, Cal decides to lower his price once again to $2.749 per gallon. Once again, volume increases and settles at 4,400 gallons per day. He is worried that any further price cut will cause the discount station across the street to also lower it price. He wants to know what his price should be.
What is the price elasticity of demand? Can the elasticity be characterized as elastic, inelastic, or neither? What does this mean and why does it matter? Will revenues increase or decrease as a result of the price cut? By how much? Cal tells you that his fixed costs are $50 per day. By how much did profits increase or decline? (Profits are revenue minus all costs.)
4. Cal's son is studying in the MBA program at UMUC. He tells his father that profit maximization occurs when marginal cost (MC) = marginal revenue (MR). Cal asks you for a definition of each. You tell Cal that his marginal cost is the same as his variable cost, or $2.661 per gallon.
Marginal revenue is more difficult. Marginal revenue is the increase in total revenue from selling one more unit or gallon. You decide that if a price change of 1 cent causes demand to change by 400 gallons, then a price change of 1 cent divided by 400 gallons is the price change to sell one more gallon.
Given that you know the price and quantity of gallons sold so far, and that Cal's cost is $2.661 per gallon, complete the table to the right:
5. Once you calculate total profit, what is the profit maximizing price?
6. Next calculate marginal revenue, knowing that it is the difference between the revenue at the price shown and the revenue at 1/400 of a cent less. Calculate 1/400 of a cent as well as the new price.
Complete the table to the right:
7. Does MC = MR at the maximum profit point?
Attachment:- Excel Workbook.rar