(240)-343-2585
Select Page

Suppose that Sea Shell oil company (SS) is pumping oil at a field off the coast of Nigeria. At this site, it has an extraction cost of \$30 per barrel for the first 10 million barrels it pumps each year and then \$60 per barrel for all subsequent barrels that it pumps each year, up to the site’s maximum capacity of 90 million barrels per year.a. Suppose the user cost is \$50 per barrel for all barrels and that the current market price for oil is \$90 per barrel. How many barrels will SS pump this year? What is the total accounting profit on the total amount of oil it pumps? What is the total economic profit on those barrels of oil?b. What if the current market price for oil rises to \$120 per barrel while the user cost remains at \$50 per barrel? How many barrels will SS pump and what will be its accounting profit and its economic profit?c. If the current market price remains at \$120 per barrel but the user cost rises to \$95 per barrel, how many barrels will SS pump this year and what will be its accounting profit and its economic profit?