ou run an oil company that wants to extract an oil reserve. The total stock of oil in the reserve is 600 barrels. You must sell all of the oil in two time periods, so the quantity extracted will be q1 +q2 = 600. The price per barrel you can sell the oil for is pt = 710 − 1 2 qt in each period. The cost of extracting a single barrel is not constant, but increases as more oil is extracted in a period, c(qt) = 1 2 qt. If the interest rate is 5%, how much oil will you extract in periods 1 and 2 if you wanted to maximize profits.

ou run an oil company that wants to extract an oil reserve. The total stock of oil in the reserve is 600 barrels. You must sell all of the oil in two time periods, so the quantity extracted will be q1 +q2 = 600. The price per barrel you can sell the oil for is pt = 710 − 1 2 qt in each period. The cost of extracting a single barrel is not constant, but increases as more oil is extracted in a period, c(qt) = 1 2 qt. If the interest rate is 5%, how much oil will you extract in periods 1 and 2 if you wanted to maximize profits.

Managerial Economics: A Problem Solving Approach

5th Edition

ISBN:9781337106665

Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Publisher:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Chapter5: Investment Decisions: Look Ahead And Reason Back

Section: Chapter Questions

Problem 2MC

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