Feedback for Project 1: Applied Economics for Managers
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MBA620_supply__demand_profit_maximizationProject1.xlsx-2ndFeedback5-27-19TBSnt.xlsxts_k_supply_&_demand_graph.docx
| Demand of Oil | |||
| Price per barrel | Daily quantity of barrels demanded (in millions) | ||
| $40.00 | 104 | 98 | |
| $50.00 | 103 | 100 | |
| $60.00 | 102 | 102 | |
| $70.00 | 101 | 104 | |
| $80.00 | 100 | 106 | |
| $90.00 | 99 | 108 | |
| $100.00 | 98 | 110 | |
| Supply of Oil | |||
| Price per barrel | Daily quantity of barrels supplied (in millions) | ||
| $40.00 | 98 | ||
| $50.00 | 100 | ||
| $60.00 | 102 | ||
| $70.00 | 102 | ||
| $80.00 | 106 | ||
| $90.00 | 108 | ||
| $100.00 | 110 | ||
| Question 1: | |||
| Question 2: | |||
| Add an equilibrium position, the supply is 102 barrels and the price is $60 per barrel. | |||
| Question 3: | |||
| If the price increase slight from equilibrium the equilibrium curve snaps this shows that the oil market is an oligopoly and rising the prices will force the firm out of the market. Formation of the kink curve at equilibrium is a strong feature of oligopoly. Conversely lowering prices results into kink demand again. But snaps downwards. | |||
| Question 3a: | |||
| Approximately 100 countries produce crude oil or natural gas. However, roughly half of all oil and gas production comes from five countries. These countries are Russia, Saudi Arabia, the United States, Iraq, and Iran. | |||
| Question 3b: | |||
| There are approximately 10 companies producing oil in the United States. | |||
| Question 3c: | |||
| Oil production industry is an example of oligopoly. The following features qualify oil industry to be an oligopoly: There are few countries producing oil and there are many consumers of oil. Recently, the OPEC organization started to influence oil prices in the market. The major oil producing countries influence policy making in oil industry. | |||
| Question 4: | |||
| Natural gas has been at a 12 month low of $58.20 and a high of $64. Over the last 12 months, unleaded gasoline has been at a low of $2.14 and a high of $2.75. Over the past 12 months, the high for diesel gas has been $3.39 per gallon and the low was $2.96 per gallon. During the same time, be high for premium gas prices has been $3.24 and the low was $2.36. | |||
| Since in perfect completion market no traders are price takers they would buy more product when the prices are low and resell when market price is higher. As in the prefect competition prices are set by market forces of demand and supply. Buying more of the petroleum product then keeping would result in a low supply thus higher demand sets in which results in higher prices. Traders will then supply the product to resell at higher marker price. | |||
| References | |||
| AAA.com. (2019). Gas prices. Retrieved from https://gasprices.aaa.com/ | |||
| EIA.gov. (2018) Oil and crude products .Retrieved from[ https://www.google.com/search?client=firefox-b-1-d&q=How+many+countries+around+the+world+produce+oil%3F++ | |||
| YCharts.com. (2019). US retail diesel price. Retrieved from https://ycharts.com/indicators/us_diesel_price | |||
To complete this assignment, address the following requests: 1. Based on the information from the US Energy Information Administration, create the supply and demand graph in the space below. This information is helpful for the client to know how much oil to produce. 2. Also identify the price and quantity at which equilibrium exists. This information is important for the client to determine the quantity of oil to produce for profit maximization. Identify this information on the supply and demand graph you created below. 3. Finally, determine if the oil and gas industry is in perfect competition, an oligopoly, or a monopoly. You may need to examine additional information on competition production and pricing decisions, monopoly production and pricing decisions, and price discrimination to answer this question. This information will help the client to determine pricing strategies. It might be helpful to know how many publically traded companies exist globally. You might also want to read about how crude oil is priced. 4. Over the past 12 months, what has been the price range of regular unleaded gasoline, natural gas, and two or three types of crude oil? Traders and speculators can buy oil contracts for future delivery. Does this make the market perfect competition? (To answer this question, you may need to visit www.OilPrice.com, the American Petroleum Institute website, or the US Energy Information Administration website.) Answer in the space below. Be as descriptive as possible and credit any sources you use.
Supply and Demand for ExxonMobil
Price per barrel 40 50 60 70 80 90 100 104 103 102 101 100 99 98 40 50 60 70 80 90 100 98 100 102 104 106 108 110Price per barrel
Quantity of Barrels
Show your work below.
To complete this assignment, address the following requests: 1. Based on the information provided, create the supply and demand graph in the space below. This information is helpful for the client to know how much oil to produce. The graph you create will show how prices are set in economic theory. In the "real world," oil and its derivative products are priced on commodity exchanges around the world. Prices can change in less than a second. The information provided is approximately four months old. 2. After you have created your graph, identify the price and quantity at which equilibrium exists. This information is important for the client to determine the quantity of oil to produce for profit maximization. Identify this information on the supply and demand graph you created below. 3. Once you have identified the point of equilibrium, determine if the oil and gas industry is in a perfect competition, an oligopoly, or a monopoly economic model. You may need to examine additional information on competition production and pricing decisions, monopoly production and pricing decisions, and price discrimination to answer this question. Recognize that almost no industry fits neatly into one of these categories. It might be helpful to know how many publicly traded companies exist globally. You might also want to read about how crude oil is priced. The degree of concentration is one way to determine whether an industry is a monopoly, oligopoly, or competitive. To get an idea of how concentrated the oil industry is, please answer the following questions: 3a. How many countries around the world produce oil? There are approximately 200 total countries in the world. 3b. How many companies or firms produce oil in the United States? 10 compaines produce oil in USA 3c. Is the oil production industry closer to the oligopoly model or the competitive model? Explain. oil production industry is an example of oligpoloy. the folowing features qualifiy oil industry to be an oligopoly : There are few countries producing oil and there are many consumers of oil. Recently, the OPEC organization started to influence oil prices in the market. The majory oil producing counries influence policy making in oil indusry. Any attempt to lower or raise the oil prices by any coumry will lead to no sales. 4. Over the past 12 months, what has been the price range of regular unleaded gasoline, natural gas, and two or three types of crude oil? Traders and speculators can buy oil contracts for future delivery. Does this make the market perfect competition? (To answer this question, you may need to visit www.OilPrice.com, the American Petroleum Institute website, or the US Energy Information Administration website.) Answer in the space below. Be as descriptive as possible and credit any sources you use.
Show your work below.
tshibangu_k_profit_maximization
| Profit Maximization | |||||||||||||||||||
| Base price of unleaded regular delivered in New York harbor (January 4, 2019) | $1.408 | ||||||||||||||||||
| Added cost to Cal: | |||||||||||||||||||
| Maryland state gasoline tax (Effective July 1, 2018) | $0.353 | ||||||||||||||||||
| Federal gasoline tax | $0.184 | ||||||||||||||||||
| Distribution & Delivery | $0.042 | ||||||||||||||||||
| Advertising and Marketing to ExxonMobil | $0.042 | ||||||||||||||||||
| Additives | $0.020 | ||||||||||||||||||
| Total additions | $0.641 | ||||||||||||||||||
| Total cost per gallon | $2.049 | ||||||||||||||||||
| Answer question 1 below. | |||||||||||||||||||
| Quantity | Price | ||||||||||||||||||
| 4000 | 2.189 | ||||||||||||||||||
| 3600 | 2.199 | -400 | 0.01 | ||||||||||||||||
| Average | Average | ||||||||||||||||||
| 3800 | 2.194 | ||||||||||||||||||
| % change | % change | Elasticity of Demand | |||||||||||||||||
| -10.526% | 0.456% | -23.095 | The price of elasticity is 23.1 | ||||||||||||||||
| Elasticity: in this case can be defined as elastic because it is above 1 | |||||||||||||||||||
| By how much did revenues increase or decrease as a result of the change in price? 839.60 [2.199x3,600 - 2.189x4,000] | |||||||||||||||||||
| By how much did profits increase or decline?The profit remained constant | |||||||||||||||||||
| Gallons sold per day | Price | Revenue (price x gallons) | Cost per Gallon | Variable Cost (cost per unit x volume) | Fixed cost per day | Total Cost (Fixed + Variable) | Profit (revenue - all costs) | ||||||||||||
| 4000 | $ 2.189 | $ 8,756.000 | $ 2.049 | $ 8,196.000 | $ 250.000 | $ 8,446.000 | $ 310.000 | ||||||||||||
| 3600 | $ 2.199 | $ 7,916.400 | $ 2.049 | $ 7,376.400 | $ 250.000 | $ 7,626.400 | $ 310.000 | ||||||||||||
| Answer question 2 below. | |||||||||||||||||||
| Quantity | Price | ||||||||||||||||||
| 3600 | 2.199 | ||||||||||||||||||
| 4400 | 2.179 | 800 | -0.02 | ||||||||||||||||
| Average | Average | ||||||||||||||||||
| 4000 | 2.189 | ||||||||||||||||||
| % change | % change | Elasticity of Demand | |||||||||||||||||
| 20.000% | -0.914% | -21.890 | The price of elasticity is 21.9 | ||||||||||||||||
| Elasticity: Elastic because > 1 | |||||||||||||||||||
| By how much did revenues increase or decrease as a result of the change in price? It has decreased by $1,671.20 | $ 1,671.20 | ||||||||||||||||||
| By how much did profits increase or decline? It has increased by 32 | |||||||||||||||||||
| Gallons sold per day | Price | Revenue (price x gallons) | Cost per Gallon | Variable Cost (cost per unit x volume) | Fixed cost per day | Total Cost (Fixed + Variable) | Profit (revenue - all costs) | ||||||||||||
| 3600 | $ 2.199 | $ 7,916.400 | $ 2.049 | $ 7,376.400 | $ 250.000 | $ 7,626.400 | $ 540.000 | ||||||||||||
| 4400 | $ 2.179 | $ 9,587.600 | $ 2.049 | $ 9,015.600 | $ 250.000 | $ 9,265.600 | $ 572.000 | ||||||||||||
| Answer question 3 below. | |||||||||||||||||||
| Quantity | Price | ||||||||||||||||||
| 4400 | 2.179 | ||||||||||||||||||
| 4800 | 2.169 | 400 | -0.01 | ||||||||||||||||
| Average | Average | ||||||||||||||||||
| 4600 | 2.174 | ||||||||||||||||||
| % change | % change | Elasticity of Demand | |||||||||||||||||
| 8.696% | -0.460% | -18.904 | The price of elasticity is 18.9 | ||||||||||||||||
| Elasticity: It is elastic because >1 | |||||||||||||||||||
| By how much did revenues increase or decrease as a result of the change in price? It is increased by $823.60 | $ 823.60 | ||||||||||||||||||
| By how much did profits increase or decline? $3,600 x 2.199= $7,916.40 =====> Unchanged | |||||||||||||||||||
| Gallons sold per day | Price | Revenue (price x gallons) | Cost per Gallon | Variable Cost (cost per unit x volume) | Fixed cost per day | Total Cost (Fixed + Variable) | Profit (revenue - all costs) | ||||||||||||
| 4400 | $ 2.179 | $ 9,587.600 | $ 2.049 | $ 9,015.600 | $ 250.000 | $ 9,265.600 | $ 572.000 | ||||||||||||
| 4800 | $ 2.169 | $ 10,411.200 | $ 2.049 | $ 9,835.200 | $ 250.000 | $ 10,085.200 | $ 576.000 | ||||||||||||
| Profit Maximization | |||||||||||||||||||
| Gallons sold per day | Price | Revenue (price x gallons) | Cost per Gallon | Variable Cost (cost per unit x volume) | Fixed cost per day | Total Cost (Fixed + Variable) | Profit (revenue - all costs) | ||||||||||||
| 3,600 | $2.199 | $7,916.40 | $2.049 | $7,376.40 | $250 | $7,626 | $290.00 | ||||||||||||
| 4,000 | $2.189 | $8,756.00 | $2.049 | $8,196.00 | $250 | $8,446 | $310.00 | ||||||||||||
| 4,400 | $2.179 | $9,587.60 | $2.049 | $9,015.60 | $250 | $9,266 | $322.00 | ||||||||||||
| 4,800 | $2.169 | $10,411.20 | $2.049 | $9,835.20 | $250 | $10,085 | $326.00 | ||||||||||||
| 5,200 | $2.159 | $11,226.80 | $2.049 | $10,654.80 | $250 | $10,905 | $322.00 | ||||||||||||
| 5,600 | $2.149 | $12,034.40 | $2.049 | $11,474.40 | $250 | $11,724 | $310.00 | ||||||||||||
| 6,000 | $2.139 | $12,834.00 | $2.049 | $12,294.00 | $250 | $12,544 | $290.00 | ||||||||||||
| 6,400 | $2.129 | $13,625.60 | $2.049 | $13,113.60 | $250 | $13,364 | $262.00 | ||||||||||||
| 6,800 | $2.119 | $14,409.20 | $2.049 | $13,933.20 | $250 | $14,183 | $226.00 | ||||||||||||
| 7,200 | $2.109 | $15,184.80 | $2.049 | $14,752.80 | $250 | $15,003 | $182.00 | ||||||||||||
| 7,600 | $2.099 | $15,952.40 | $2.049 | $15,572.40 | $250 | $15,822 | $130.00 | ||||||||||||
| 8,000 | $2.089 | $16,712.00 | $2.049 | $16,392.00 | $250 | $16,642 | $70.00 | ||||||||||||
| 8,400 | $2.079 | $17,463.60 | $2.049 | $17,211.60 | $250 | $17,462 | $2.00 | ||||||||||||
| 8,800 | $2.069 | $18,207.20 | $2.049 | $18,031.20 | $250 | $18,281 | -$74.00 | ||||||||||||
| 9,200 | $2.059 | $18,942.80 | $2.049 | $18,850.80 | $250 | $19,101 | -$158.00 | ||||||||||||
| Answer question 5 below. It is 2.169 | |||||||||||||||||||
| Marginal Revenue | Marginal Cost | ||||||||||||||||||
| Gallons sold per day | Price | Revenue (price x gallons) | Marginal revenue | Cost per gallon | Variable Cost | Fixed Cost | Total Cost | Marginal Cost | |||||||||||
| 3,600 | $2.199000 | $7,916.40 | $2.049 | $7,376.40 | $250.00 | $7,626.40 | |||||||||||||
| 3,601 | $2.198975 | $7,918.51 | $2.1090 | $2.049 | $7,378.45 | $250.00 | $7,628.45 | $2.0490 | |||||||||||
| 4,000 | $2.189000 | $8,756.00 | $2.049 | $8,196.00 | $250.00 | $8,446.00 | |||||||||||||
| 4,001 | $2.188975 | $8,758.09 | $2.0890 | $2.049 | $8,198.05 | $250.00 | $8,448.05 | $2.0490 | |||||||||||
| 4,400 | $2.179000 | $9,587.60 | $2.049 | $9,015.60 | $250.00 | $9,265.60 | |||||||||||||
| 4,401 | $2.178975 | $9,589.67 | $2.0690 | $2.049 | $9,017.65 | $250.00 | $9,267.65 | $2.0490 | |||||||||||
| 4,800 | $2.169000 | $10,411.20 | $2.049 | $9,835.20 | $250.00 | $10,085.20 | |||||||||||||
| 4,801 | $2.168975 | $10,413.25 | $2.0490 | $2.049 | $9,837.25 | $250.00 | $10,087.25 | $2.0490 | |||||||||||
| 5,200 | $2.159000 | $11,226.80 | $2.049 | $10,654.80 | $250.00 | $10,904.80 | |||||||||||||
| 5,201 | $2.158975 | $11,228.83 | $2.0290 | $2.049 | $10,656.85 | $250.00 | $10,906.85 | $2.0490 | |||||||||||
Cal Overhaut operates an ExxonMobil gas station franchise in Fitzhugh, MD. The price of gasoline is volatile and varies greatly from day to day. The price per gallon varies based on the seasonal blend of gasoline, which is determined by clean-air requirements, and Cal's pricing choices are limited to the profit margin for his price. Daily prices can be found at https://www.eia.gov/dnav/pet/hist/EER_EPMRU_PF4_Y35NY_DPGD.htm. Cal recently raised the price of gas by 1 cent per gallon from $2.189 to $2.199, and his profit declined. Cal would like you to measure his business gains or losses based on the price of $2.189 per gallon. Cal competes with a local brand on the opposite corner that typically sells gas for 2 to 3 cents per gallon less than his station. They are currently selling gasoline for $2.159 per gallon. Recently, regular gasoline for delivery in New York harbor sold for $1.408 per gallon. We will use this price in our exercise. Cal tells you that his fixed costs are $250 per day. To the right are additional charges that Cal must pay on each gallon of gasoline. Answer the seven questions below. You are required to use Excel for all calculations.
1. Cal sold 4,000 gallons per day at a price of $2.189 per gallon. He raised the price 1 cent to $2.199 per gallon, and revenues and profits dropped. His station sold 3,600 gallons per day at $2.199 per gallon. Fixed costs are $250 per day. What is the price elasticity of demand? It is Can the elasticity be characterized as elastic, inelastic, or neither? Elastic By how much did revenues increase or decrease as a result of the change in price? By how much did profits increase or decline? (Profits are revenue minus all costs.)
6. Next calculate marginal revenue, knowing that it is the difference between the revenue at the price shown and the revenue at 1/400 of a cent less. Calculate 1/400 of a cent as well as the new price. Calculate the marginal cost of selling one more gallon at each price. Prove that MC = $2.049 Prove to Cal that MR = MC at the maximum profit. Complete the table to the right.
7. Does MC = MR at the maximum profit point? Yes, it does
2. After seeing your analysis of his decline in profit, Cal decides to lower the price of gas to $2.179 per gallon. After this change, the volume sold increased to 4,400 gallons per day. He asks you to measure his business gains or losses at $2.179. Fixed costs are $250 per day. What is the price elasticity of demand? Can the elasticity be characterized as elastic, inelastic, or neither? By how much did revenues increase or decrease as a result of the change in price? By how much did profits increase or decline? (Profits are revenue minus all costs.)
3. After seeing the result (from question 2), Cal decides to lower his price once again to $2.169 per gallon. Once again, volume increases and settles at 4,800 gallons per day. He is worried that any further price cut will cause the discount station across the street to also lower it price. He wants to know what his price should be. What is the price elasticity of demand? Can the elasticity be characterized as elastic, inelastic, or neither? By how much did revenues increase or decrease as a result of the change in price? By how much did profits increase or decline? (Profits are revenue minus all costs.)
4. Cal's son is studying in the MBA program at UMUC. He tells his father that profit maximization occurs when marginal cost (MC) = marginal revenue (MR). Cal asks you for a definition of each. You tell Cal that his marginal cost is the same as his variable cost, or $2.049 per gallon. Technically, marginal cost is the added cost from selling one more gallon. Marginal revenue is more difficult. Marginal revenue is the increase in total revenue from selling one more unit or gallon. You decide that if a price change of 1 cent causes demand to change by 400 gallons, then a price change of 1 cent divided by 400 gallons is the price change to sell one more gallon. To calculate MR calculate the revenue at one price level and then calculate the revenue at the price minus $0.01 / 400. Volume increases by 1 gallon. Cal says that is all fine, but first asks you to show him his maximum profit. He asks you for a chart with profits at many volume levels, assuming that he continues to sell 400 more gallons for each 1 cent decrease in price. Also, he wants to know how much can he lower price before his gasoline business loses money. Given that you know the price and quantity of gallons sold so far, and that Cal's cost per gallon is $2.049 per gallon and his fixed cost is $250 per day, complete the table to the right.
5. Once you calculate total profit, what is the profit maximizing price?
