Suppose global demand for (OPEC) oil is given by P = 120 − 2Q and that each country has costs given as AC = MC = $20. The cartel maximizes profit at Q = 25 million and P = $70/barrel.
(a) (4 pts) If instead of keeping to this output, all members overproduced their quotas by 20 percent, what would be the effect on OPEC’s total profit?
(b) (4 pts) Suppose instead one member increased production from 2 million to 3 million barrels. Break down the impact of this in terms of revenue and costs for both the cheating country and the cartel.