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Suppose two companies own adjacent oil fields. Under the two fields is a common pool of oil worth $60 million. For each well that is drilled, the company that drills the well incurs a cost of $4 million. Each company can drill up to two wells. What is the likely outcome of this game if each company pursues its own self-interest?

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eooyibo123

Answer:

Each company drills two wells and experiences a profit of $22 million.

Explanation:

If each company acts independently and drills two oil wells each they will have a total of 4 wells each worth (60 million ÷ 4= $15 million.

Each company will have two oil wells which equals (2* 15 million = $30 million)

But each company incurs cost of $4 million per well. That is total cost of $8 million.

Therefore the profit for each company will be $30 million - $8 million= $22 million

Each company drills two wells and experiences a profit of $22 million.

  • The calculation is as follows:

In the case when each company acts independently and drills two oil wells each they will have a total of 4 wells each worth i.e.

= (60 million ÷ 4)

= $15 million.

Now  

Each company will have two oil wells i.e.

= 2(15 million)

= 30 million

However each company incurs cost of $4 million per well.So, the total cost of $8 million.

Now  

Therefore the profit for each company will be

=  $30 million - $8 million

= $22 million

Learn more: https://brainly.com/question/1605083?referrer=searchResults

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