Suppose you have three producers of oil A, B, and C, with extractions costs of $8, $10, and $12 per barrel of oil. Assume there are no user costs. Assume that each well can produce 100 barrels of oil per day.

If price of oil is $ 9 per barrel, then only producer A will enter the market as B and C are not able to cover their cost at this price and hence 100 barrels of oil will be produced.

If price of oil is $ 10 per barrel, then only producer A and B will enter the market as C is not able to cover their cost at this price and hence 200 barrels of oil will be produced.

If price of oil is $ 11 per barrel, then only producer A and B will enter the market as C is not able to cover their cost at this price and hence 200 barrels of oil will be produced.

Total rent = price - cost of extraction = 11-8 =$ 3 per barrel = 3*100 =300

QUESTION:

Assume now that the demand curve shifts upward so that it starts at $40 but decreases at the same rate, i.e.

Price    Quantity Demanded

$40                  0

$39                  5

$38                  10

$37                  15

Assuming the discount rate r=0.

How many barrels will be extracted in the first year? __________. In the second year? __________.

What will be the total marginal cost in the first year? __________ . In the second year? __________.

What will be the user cost in the first year? __________.       In the second year? __________.