Case Study Suppose that there are only two firms in the petroleum market Saudi A
ID: 1117699 • Letter: C
Question
Case Study Suppose that there are only two firms in the petroleum market Saudi Aramco (SA) and Kuwait Petroleum Corporation (KPC). They give you some information about the petroleum market and you have to answer the questions below # Demand Equation: P = 110-Q # For each firm marginal cost MC-S20. # [Quantity of outcome (qsa), Price (psa), Profit (Tsa)], [Quantity of outcome (qKPC), Price (poc), Profit ( KPc)] In duopoly market, and with using Cournot-Nash Equilibrium and diagram calculate: Nash equilibrium quantities 1. Equilibrium price. 2. Profit to each firm. then: 1- What do you think the objectives of this cartel? 2- Calculate the following in monopoly market and compare them with previous results 1. Quantity of output ii. Price. iii. Profit to each firm.Explanation / Answer
Under cournot competition:
Response function of SA : Profitsa = TRsa - TCsa = (110-qsa-qkpc)qsa - 20qsa
F.O.C
dProfitsa/dqsa = 110-2qsa-qkp-20
S.O.C
dProfitsa/dqsa = 0
qkpc = 90-2qsa ...... eq 1
Similarly, response function of KPC:
Profitkpc = TRkpc - TCkpc = (110-qsa-qkpc)qkpc - 20qkpc
F.O.C
dProfitsa/dqkpc = 90-2qkpc-qsa
S.O.C
dProfitkpc/dqkpc = 0
qkpc = 45-0.5qsa ...... eq 2
from eq 1 and 2
45-0.5qsa = 90-2qsa
qsa = 30
and qkpc = 90-2(30) = 30
and Price = 110 - 30 - 30 = $50.
Profit of each firm = (50*30)-20*30 = $900.
A. If firm form monopoly through cartel then their sole objective wuld be to maximize their joint profit.
Under cartel they would act as monopoly hence will decide output and price at MR = MC
MR = dTR/dQ
TR = P*Q = 110Q-Q2
MR = 110-2Q
and MC = 20
thus 110-2Q = 20
Q = 45
And price = 110-45 = $65
And profit = (65*45)-(20*45) = $2025.
Profit to each firm = 2025/2 = $1012.5
As we see the output has been decreased of industry and price has been increased because of formation of such cartel.