In most "normal" years (years in which the market has not been disrupted by Middle East wars), at each Organization of Petroleum Exporting Countries (OPEC) meeting, Saudi Arabia, the largest oil producer, argues that the cartel should cut production. The Saudis complain that most OPEC countries (including Saudi Arabia) produce more oil than they are allotted under their cartel agreement. Use a graph and words to explain why cartel members would produce more than the allotted amount despite their understanding that overproduction will drive down the price of their product. Assume the marginal cost (MC) and average cost (AC) of production for one of the n members of OPEC are illustrated in the figure to the right. The cartel price is pm, at which each member is allowed to produce am units of output to maximize cartel profits. For simplicity, assume a single OPEC member can increase production without substantially changing the cartel price. Using the triangle drawing tool, illustrate the maximum amount by which the OPEC member's profits can increase by cheating on the cartel agreement. Label this change 'Increased profits.' Carefully follow the instructions above, and only draw the required object. per unit Pm JMC am q. Units per year MC AC
In most "normal" years (years in which the market has not been disrupted by Middle East wars), at each Organization of Petroleum Exporting Countries (OPEC) meeting, Saudi Arabia, the largest oil producer, argues that the cartel should cut production. The Saudis complain that most OPEC countries (including Saudi Arabia) produce more oil than they are allotted under their cartel agreement. Use a graph and words to explain why cartel members would produce more than the allotted amount despite their understanding that overproduction will drive down the price of their product. Assume the marginal cost (MC) and average cost (AC) of production for one of the n members of OPEC are illustrated in the figure to the right. The cartel price is pm, at which each member is allowed to produce am units of output to maximize cartel profits. For simplicity, assume a single OPEC member can increase production without substantially changing the cartel price. Using the triangle drawing tool, illustrate the maximum amount by which the OPEC member's profits can increase by cheating on the cartel agreement. Label this change 'Increased profits.' Carefully follow the instructions above, and only draw the required object. per unit Pm JMC am q. Units per year MC AC
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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CS 25
Economics
Transcribed Image Text:In most "normal" years (years in which the market has not been disrupted by Middle East wars), at
each Organization of Petroleum Exporting Countries (OPEC) meeting, Saudi Arabia, the largest oil
producer, argues that the cartel should cut production. The Saudis complain that most OPEC
countries (including Saudi Arabia) produce more oil than they are allotted under their cartel
agreement. Use a graph and words to explain why cartel members would produce more than the
allotted amount despite their understanding that overproduction will drive down the price of their
product.
Assume the marginal cost (MC) and average cost (AC) of production for one of the n members of
OPEC are illustrated in the figure to the right. The cartel price is pm, at which each member is
allowed to produce am units of output to maximize cartel profits. For simplicity, assume a single
OPEC member can increase production without substantially changing the cartel price.
Using the triangle drawing tool, illustrate the maximum amount by which the OPEC member's profits
can increase by cheating on the cartel agreement. Label this change 'Increased profits.'
Carefully follow the instructions above, and only draw the required object.
p, S per unit
Pm
9m
q, Units per year
MC
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