Oil Production extract
An oil producer has 60 barrels of oil to extract and sell in two periods. Assume that the cost of producing the 60 barrels of oil is $0.05/barrel. He will sell the oil either in period 0 and period 1. The demand curve in the two periods are P0 = 5 - 0.05Q0 in period 0 and P1 = 5 - 0.033Q1 in period 1. The discount rate is 10%.(i) If the producer has monopoly power in the market, what’s his extraction plan?
(ii) If the government levies 5% tax on the Hotelling rent in period 0, no tax in period 1, what’s his extraction plan in this scenario? (hint: if tax rate is t%, the agent taxed receives r(1-t) from revenue or taxing object r).
(iii) If the government levies 5% tax on the Hotelling rent in both periods, what’s his extraction plan? Any surprised findings?