The long-run cost of gas is 100. The price step size is 1.25. The initial price of gas is two steps below the long-run cost. The well produces 10 units of gas in the first period of drilling and 7 in the second period of drilling. The cost of drilling in the first period is 800 in the first period and 600 in the second period. The royalty rate will be 15%. Let the step coefficient Z=6, so that the probably of an up move is 0.5(6-S)/6.
When will the producer start production on this well? How much will the bonus payment for this well be in a competitive market?