Which maximizes the sum of the profits of both firms

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Reference no: EM1315513

The oil industry in Utopia is a duopoly. Both firms draw oil from a single (also practically inexhaustible) pool. Oil can be sold on the world market at a stable price of $10 per barrel. The cost of operating a well for one yr is $1000. Total output per yr (Q) of the oil field is a function of the number of wells operating in the field: Q = 500*N - N^2, where N = N1 + N2 is the sum of the wells operated by firm 1 (N1) also firm 2 (N2), particularly. The output per well is given by: q = Q/N = 500 - N.

a) Illustrate what is the total number of wells which maximizes the sum of the profits of both firms?

b) Assume now which the two firms behave non - cooperatively. Solve for the Nash equilibrium of the game between the two firms. Is the total number of wells in equilibrium efficient? Why or why not?

Reference no: EM1315513

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