Q. Assume that, over the short run (say, the next five years), demand for OPEC oil is given by Q = 57.5 -.5P or equivalently, P = 115 - 2Q. (Here Q is measured in millions of barrels every day.) OPEC's marginal cost every barrel is $15.
a. Illustrate what is OPEC's optimal level of production? Illustrate what is the prevailing price of oil at this level?
b. Many experts contend that maximizing short-run profit is counterproductive for OPEC in the long run because high prices introduce buyers to conserve energy also seeks supplies elsewhere. Assume the demand curve just describes will remain unchanged only if oil process stabilize at $50 every barrel or below. If oil price exceeds this threshold, long-run demand (over a second five-year period) will be curtailed to Q = 42 -.4P (or P = 105 -2.5Q). OPEC seeks to maximize its total profit over the next decade. Illustrate what is its optimal output also price policy