Applied Economics for Managers
vemylami
Projectanalysissolution.xlsxSupply and Demand Graph
| Future Supply and Demand for Crude Oil | |||
| Price per barrel (2208) | Daily US demand for crude oil (in millions of barrels per day) | Daily US supply of crude oil (in millions of barrels per day) | |
| $25.00 | 1.0 | 0.5 | |
| $30.00 | 0.9 | 0.6 | |
| $35.00 | 0.8 | 0.7 | |
| $40.00 | 0.7 | 0.8 | |
| $45.00 | 0.6 | 0.9 | |
| $50.00 | 0.5 | 1.0 | |
| $55.00 | 0.4 | 1.1 | |
| Data from https://www.iea.org | |||
| Question 1: | |||
| Equilibrium: | $35 Price | ||
| Question 2 | |||
| The demand for the oil is expected to increase in the short term. The global economic activity is expected | |||
| to increase in the upcoming period which will become a major reason for increase in the demand of oil (Stiglitz, 2019). | |||
| Question 3 | |||
| There are several risks that are present in the global oil market. The COVID 19 pandemic has caused many issues for the oil industry. | |||
| Due to pandemic the demand of the oil can get effected. The decrease in demand will effect the supply of oil as well. | |||
| The lockdowns situation can effect the supply of oil and various issues might have to be faced by the industry (Dixit, 2014). | |||
| Question 4 | |||
| Oil market is oligopoly because thare are few countries who dominate the oil industry. Countries like Saudi Arabia, Iran etc have major | |||
| share in the oil market (Dixit, 2014). | |||
| Question 5 | |||
| The COVID 19 pandemic has caused many issues for the oil industry. The demand and supply is effected due to pandemic (Dixit, 2014). | |||
Show your work below.
Oil Supply and Demand
Daily US demand for crude oil (in millions of barrels per day) 1 0.9 0.8 0.7 0.6 0.5 0.4 0 25 30 35 40 45 50 55 Daily US supply of crude oil (in millions of barrels per day) 0.5 0.6 0.7 0.8 0.9 1 1.1000000000000001 0 25 30 35 40 45 50 55
Oil Supply and Demand
Daily US demand for crude oil (in millions of barrels per day) 1 0.9 0.8 0.7 0.6 0.5 0.4 30 35 40 45 50 55 60 Daily US sup ply of crude oil (in millions of barrels per day) 0.7 0.8 0.9 1 1.1000000000000001 1.2 1.3 30 35 40 45 50 55 60
To complete this project step, address the following: 1. Based on the information provided from the International Energy Agency (IEA) in the table on the left, examine the supply and demand graph in the space below. This information is helpful for our client ExxonMobil to know how much oil to produce. The graph shows crude oil prices per barrel and the supply and demand for the number of barrels in the united States per day. After you have examined the graph below, identify the price and quantity and price at which equilibrium exists. This information is important for the client to determine the quantity of oil to produce for profit maximization. 2. The global demand for oil changes with the changes in global economies. As economic activity increases, the global demand for oil increases. For the past several years, the global demand for oil has increased (https://www.iea.org/oilmarketreport/omrpublic/). As the global demand changes, we can observe this change graphically. What changes are expected in the short-term? To answer this question, please see https://www.eia.gov/outlooks/steo/. Support your statements with research and references. 3. What are potential supply and demand risks in the global oil market? Support your statements with research and references. 4. Is the global oil and gas market in a monopoly, oligopoly, or competitive economic model? Why? Support your statements with research and references. Answer in the space below. Be as descriptive as possible and credit any sources you use.
Show your work below.
Show your work below.
To complete this project step, address the following: 1. Based on the information provided from the International Energy Agency (IEA) in the table on the left, examine the supply and demand graph in the space below. This information is helpful for our client ExxonMobil to know how much oil to produce. The graph shows crude oil prices per barrel and the supply and demand for the number of barrels in the united States per day. After you have examined the graph below, identify the price and quantity and price at which equilibrium exists. This information is important for the client to determine the quantity of oil to produce for profit maximization. 2. The global demand for oil changes with the changes in global economies. As economic activity increases, the global demand for oil increases. For the past several years, the global demand for oil has increased (https://www.iea.org/oilmarketreport/omrpublic/). As the global demand changes, we can observe this change graphically. What changes are expected in the short-term? To answer this question, please see https://www.eia.gov/outlooks/steo/. Support your statements with research and references. 3. What are potential supply and demand risks in the global oil market? Support your statements with research and references. 4. Is the global oil and gas market in a monopoly, oligopoly, or competitive economic model? Why? Support your statements with research and references. 5. To what extent do you think that the current Covid-19 pandemic crisis will impact the global oil market in the long run and more specifically are there implication for Exxon Oil? Be as descriptive as possible and credit any sources you use.
Show your work below.
Profit Maximization
| Profit Maximization | |||||||||||||||||||
| Base price of unleaded regular delivered in New York harbor (January 27, 2020) | $1.517 | ||||||||||||||||||
| 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 | $2.158 | ||||||||||||||||||
| Answer question 1 below. | |||||||||||||||||||
| Quantity | Price | ||||||||||||||||||
| 4000 | 2.658 | ||||||||||||||||||
| 3600 | 2.758 | ||||||||||||||||||
| Average | Average | ||||||||||||||||||
| 3800 | 2.708 | ||||||||||||||||||
| % change | % change | Elasticity of Demand | |||||||||||||||||
| -10.000% | 3.762% | -2.658 | |||||||||||||||||
| Elasticity: | Price Elastic | ||||||||||||||||||
| By how much did revenues increase or decrease as a result of the change in price? | -6.61% | ||||||||||||||||||
| By how much did profits increase or decline? | 10.24% | ||||||||||||||||||
| 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) | Daily Profit (revenue - all costs) | ||||||||||||
| 4000 | $ 2.658 | $ 10,632.00 | $ 2.158 | $ 8,632.00 | $ 438.00 | $ 9,070.00 | $ 1,562.00 | ||||||||||||
| 3600 | $ 2.758 | $ 9,928.80 | $ 2.158 | $ 7,768.80 | $ 438.00 | $ 8,206.80 | $ 1,722.00 | ||||||||||||
| Answer question 2 below. | |||||||||||||||||||
| Quantity | Price | ||||||||||||||||||
| 3600 | 2.758 | ||||||||||||||||||
| 4400 | 2.558 | ||||||||||||||||||
| Average | Average | ||||||||||||||||||
| 4000 | 2.658 | ||||||||||||||||||
| % change | % change | Elasticity of Demand | |||||||||||||||||
| 22.222% | -7.252% | -3.064 | |||||||||||||||||
| Elasticity: | Price Inelastic | ||||||||||||||||||
| By how much did revenues increase or decrease as a result of the change in price? | 13.36% | ||||||||||||||||||
| By how much did profits increase or decline? | -23.23% | ||||||||||||||||||
| 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) | Daily Profit (revenue - all costs) | ||||||||||||
| 3600 | $ 2.758 | $ 9,928.80 | $ 2.158 | $ 7,768.80 | $ 438.00 | $ 8,206.80 | $ 1,722.00 | ||||||||||||
| 4400 | $ 2.558 | $ 11,255.20 | $ 2.158 | $ 9,495.20 | $ 438.00 | $ 9,933.20 | $ 1,322.00 | ||||||||||||
| Answer question 3 below. | |||||||||||||||||||
| Quantity | Price | ||||||||||||||||||
| 4400 | 2.558 | ||||||||||||||||||
| 4800 | 2.458 | ||||||||||||||||||
| Average | Average | ||||||||||||||||||
| 4600 | 2.508 | ||||||||||||||||||
| % change | % change | Elasticity of Demand | |||||||||||||||||
| 9.091% | -3.909% | -2.325 | |||||||||||||||||
| Elasticity: | Unit Price Elastic | ||||||||||||||||||
| By how much did revenues increase or decrease as a result of the change in price? | 4.83% | ||||||||||||||||||
| By how much did profits increase or decline? | -24.21% | ||||||||||||||||||
| 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) | Daily Profit (revenue - all costs) | ||||||||||||
| 4400 | $ 2.558 | $ 11,255.20 | $ 2.158 | $ 9,495.20 | $ 438.00 | $ 9,933.20 | $ 1,322.00 | ||||||||||||
| 4800 | $ 2.458 | $ 11,798.40 | $ 2.158 | $ 10,358.40 | $ 438.00 | $ 10,796.40 | $ 1,002.00 | ||||||||||||
| 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) | Daily Profit (revenue - all costs) | ||||||||||||
| 2400 | $ 3.058 | $ 7,339.20 | $ 2.158 | $ 5,179.20 | $ 438.00 | $ 5,617.20 | $ 1,722.00 | ||||||||||||
| 2800 | $ 2.958 | $ 8,282.40 | $ 2.158 | $ 6,042.40 | $ 439.00 | $ 6,481.40 | $ 1,801.00 | ||||||||||||
| 3000 | $ 2.908 | $ 8,724.00 | $ 2.158 | $ 6,474.00 | $ 440.00 | $ 6,914.00 | $ 1,810.00 | ||||||||||||
| 3200 | $ 2.858 | $ 9,145.60 | $ 2.158 | $ 6,905.60 | $ 441.00 | $ 7,346.60 | $ 1,799.00 | ||||||||||||
| 3600 | $ 2.758 | $ 9,928.80 | $ 2.158 | $ 7,768.80 | $ 442.00 | $ 8,210.80 | $ 1,718.00 | ||||||||||||
| 4000 | $ 2.658 | $ 10,632.00 | $ 2.158 | $ 8,632.00 | $ 443.00 | $ 9,075.00 | $ 1,557.00 | ||||||||||||
| 4400 | $ 2.558 | $ 11,255.20 | $ 2.158 | $ 9,495.20 | $ 444.00 | $ 9,939.20 | $ 1,316.00 | ||||||||||||
| 4800 | $ 2.458 | $ 11,798.40 | $ 2.158 | $ 10,358.40 | $ 445.00 | $ 10,803.40 | $ 995.00 | ||||||||||||
| 5200 | $ 2.358 | $ 12,261.60 | $ 2.158 | $ 11,221.60 | $ 446.00 | $ 11,667.60 | $ 594.00 | ||||||||||||
| 5600 | $ 2.258 | $ 12,644.80 | $ 2.158 | $ 12,084.80 | $ 447.00 | $ 12,531.80 | $ 113.00 | ||||||||||||
| 6000 | $ 2.158 | $ 12,948.00 | $ 2.158 | $ 12,948.00 | $ 448.00 | $ 13,396.00 | $ (448.00) | ||||||||||||
| 6400 | $ 2.058 | $ 13,171.20 | $ 2.158 | $ 13,811.20 | $ 449.00 | $ 14,260.20 | $ (1,089.00) | ||||||||||||
| 6800 | $ 1.958 | $ 13,314.40 | $ 2.158 | $ 14,674.40 | $ 450.00 | $ 15,124.40 | $ (1,810.00) | ||||||||||||
| 7200 | $ 1.858 | $ 13,377.60 | $ 2.158 | $ 15,537.60 | $ 451.00 | $ 15,988.60 | $ (2,611.00) | ||||||||||||
| 7600 | $ 1.758 | $ 13,360.80 | $ 2.158 | $ 16,400.80 | $ 452.00 | $ 16,852.80 | $ (3,492.00) | ||||||||||||
| 8000 | $ 1.658 | $ 13,264.00 | $ 2.158 | $ 17,264.00 | $ 453.00 | $ 17,717.00 | $ (4,453.00) | ||||||||||||
| 8400 | $ 1.558 | $ 13,087.20 | $ 2.158 | $ 18,127.20 | $ 454.00 | $ 18,581.20 | $ (5,494.00) | ||||||||||||
| 8800 | $ 1.458 | $ 12,830.40 | $ 2.158 | $ 18,990.40 | $ 455.00 | $ 19,445.40 | $ (6,615.00) | ||||||||||||
| 9200 | $ 1.358 | $ 12,493.60 | $ 2.158 | $ 19,853.60 | $ 456.00 | $ 20,309.60 | $ (7,816.00) | ||||||||||||
| Answer question 5 below. | |||||||||||||||||||
| $2.908 | |||||||||||||||||||
| 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 | |||||||||||
| 2800.0 | $ 2.958000 | $8,282.40 | $2.158 | $6,042.40 | $438.00 | $6,480.40 | |||||||||||||
| 2800.1 | $ 2.957975 | $8,282.63 | $0.2258 | $2.158 | $6,042.62 | $438.00 | $6,480.62 | $0.2158 | |||||||||||
| 3000.0 | $ 2.908000 | 8724.00 | $2.158 | $6,474.00 | $438.00 | $6,912.00 | |||||||||||||
| 3000.1 | $ 2.907975 | 8724.22 | $0.2158 | $2.158 | $6,474.22 | $438.00 | $6,912.22 | $0.2158 | |||||||||||
| 3200.0 | $ 2.858000 | 9145.60 | $2.158 | $6,905.60 | $438.00 | $7,343.60 | |||||||||||||
| 3200.1 | $ 2.857975 | 9145.81 | $0.2058 | $2.158 | $6,905.82 | $438.00 | $7,343.82 | $0.2158 | |||||||||||
| 3600.0 | $ 2.758000 | 9928.80 | $2.158 | $7,768.80 | $438.00 | $8,206.80 | |||||||||||||
| 3600.1 | $ 2.757975 | 9928.99 | $0.1858 | $2.158 | $7,769.02 | $438.00 | $8,207.02 | $0.2158 | |||||||||||
| 4000.0 | $2.658000 | 10632.00 | $2.158 | $8,632.00 | $438.00 | $9,070.00 | |||||||||||||
| 4000.1 | $ 2.657975 | 10632.17 | $0.1658 | $2.158 | $8,632.22 | $438.00 | $9,070.22 | $0.2158 | |||||||||||
| 4400.0 | $2.558000 | 11255.20 | $2.158 | $9,495.20 | $438.00 | $9,933.20 | |||||||||||||
| 4400.1 | $ 2.557975 | 11255.35 | $0.1458 | $2.158 | $9,495.42 | $438.00 | $9,933.42 | $0.2158 | |||||||||||
| 4800.0 | $2.458000 | 11798.40 | $2.158 | $10,358.40 | $438.00 | $10,796.40 | |||||||||||||
| 4800.1 | $ 2.457975 | 11798.53 | $0.1258 | $2.158 | $10,358.62 | $438.00 | $10,796.62 | $0.2158 | |||||||||||
| 5200.0 | $2.358000 | 12261.60 | $2.158 | $11,221.60 | $438.00 | $11,659.60 | |||||||||||||
| 5200.1 | $ 2.357975 | 12261.71 | $0.1058 | $2.158 | $11,221.82 | $438.00 | $11,659.82 | $0.2158 | |||||||||||
| 5600.0 | $2.258000 | 12644.80 | $2.158 | $12,084.80 | $438.00 | $12,522.80 | |||||||||||||
| 5600.1 | $ 2.257975 | 12644.89 | $0.0858 | $2.158 | $12,085.02 | $438.00 | $12,523.02 | $0.2158 | |||||||||||
| Cost should be kept minimun so that the profit can be maximised. Cost management is crucial for | |||||||||||||||||||
| maximizing profit. Revenue generation must be kept higher by setting competitive prices | |||||||||||||||||||
| Select One | |||||||||||||||||||
| Price Elastic | |||||||||||||||||||
| Price Inelastic | |||||||||||||||||||
| Unit Price Elastic | |||||||||||||||||||
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. Cal's pricing options are based on the desired profit margin. Conventional Gasoline Regular Spot Prices can be found at https://www.eia.gov/dnav/pet/hist/EER_EPMRU_PF4_Y35NY_DPGD.htm. Cal recently raised the price of regular gas by 1 cent per gallon from $2.658 to $2.758, and his revenue decreased and profit increased. Cal would like you to explain why that happened. Cal competes with another gas station across the street that typically sells regular gas for 2 to 3 cents per gallon less than his station. They are currently selling gasoline for $2.458 per gallon. Recently, regular gasoline for delivery in New York harbor sold for $1.517 per gallon. Cal tells you that his gas station has fixed operating costs of about $438 per day. To the right are the components that determine the cost of a gallon of regular gasoline to Cal's business. Answer the seven questions below. You are required to use Excel for all calculations.
1. Last week, Cal sold an average of 4,000 gallons per day at an average price of $2.658 per gallon. This week, he raised the average price to $2.758 per gallon, and both revenues and profits dropped. His station is now selling an average of 3,600 gallons per day. Fixed costs of operating the gas station are $438 per day. What is the price elasticity of demand? Can the demand be characterized as price elastic, price 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? (Profit is revenue minus total cost.)
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 zero point one (0.1) more gallon at each price. Prove that MC = $0.2158 Complete the table to the right.
7. What advice can you give to Cal on setting prices to maximize profit?
2. After seeing your analysis, Cal decides to lower the price of gas from $2.758 to $2.558 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 as a result of this price change. Fixed costs are $438 per day. What is the price elasticity of demand? Can the demand be characterized as price elastic, price 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? (Profit is revenue minus total cost.)
3. After seeing the result (from question 2), Cal decides to lower his price once again from $2.558 to $2.458 per gallon. Once again, volume sold 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. What is the price elasticity of demand? Can the demand be characterized as price elastic, price 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? (Profit is revenue minus total cost.)
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 understands that his marginal cost is the same as his variable cost, or $2.158 per gallon. Technically, marginal cost is the added cost from selling one more gallon. Cal asks you for a chart to show how profits vary with sales volume, assuming that he sells an additional 400 gallons for each 10 cent decrease in price. Also, he wants to know by how much he can lower his price without losing money. Given that you know the price and quantity of gallons sold so far, and that Cal's cost per gallon is $2.158 per gallon and his fixed cost is $438 per day, complete the table to the right.
5. Once you calculate total profit, what is the profit maximizing price?
Bibliography
| Bibliography | |
| Dixit, A. (2014). Microeconomics: A Very Short Introduction (illustrated ed.). OUP Oxford. | |
| Stiglitz, J. E. (2019). Rethinking Microeconomics. Oxford University Press. |
