In the market for oil, the (inverse) demand curve is P = 200 – Q. MR is 200 – 2Q. MC is 0.5Q + 50. (Prices are in price per barrel, and Q units are millions of barrels.) If OPEC controls production, how much should they release onto the market if they want to maximize their profit?
***Enter your answers in terms of Q, so 10 million would go in as just 10.***
To maximize profit, OPEC should produce the quantity where its marginal revenue (MR) equals its marginal cost (MC). First, let's find the MR and MC equations:
MR = 200 - 2Q
MC = 0.5Q + 50
Set MR equal to MC and solve for Q:
200 - 2Q = 0.5Q + 50
Combine like terms:
2.5Q = 150
Divide both sides by 2.5:
Q = 60
Therefore, OPEC should release 60 million barrels of oil onto the market to maximize their profit.