Suppose that the demand for crude oil is given by:

Q = -2000P + 70,000

where Q is the quantity of oil in thousand of barrels per year and P is the dollar price per barrel. Suppose also that there are 1000 identical small producers of crude oil, each with marginal costs given by:

MC = q + 5

where q is the output of the typical firm.

(a) Assuming that each small producer acts as a price taker, find out the market supply curve and the market equilibrium price and quantity.

(b) Suppose a practically infinite supply of crude oil is discovered in New Jersey by a would-be price leader and that this oil can be produced at a constant average and marginal cost of $15 per barrel. Assuming that the supply behavior of the competitive fringe described in part (a) is not changed by the discovery, how much should the price leader produce in order to maximize profits? What price and quantity will now prevail in the market?

(c) Sketch the demand curve. Does consumer surplus increase as a result of the New Jersey oil discovery? How does consumer surplus after the discovery compare to what would exist if the new Jersey oil were supplied competitively?