Umuc mba 620 project 1

Feedback For Project 1: Applied Economics For Managers

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
$70.00 104
$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:
The oil and natural gas industry has traditionally been an oligopolistic market environment. This is true because a limited number of enterprises and government-controlled firms have been able to dictate oil production and prices to the global economy. While the number of oil producing enterprises has increased over the years, there are still very high barriers to entry and a limited number of firms who controlled the market period as a result, is industry is an oligopoly.
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 47 companies producing oil in the United States.
Question 3c:
The oil and natural gas market is closer to an oligopoly than any other market structure because there are a small number of companies that vastly outproduce others around the world.
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.
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
Prof Feedback
Feedback for Step 2:
· The responses to questions 2 and 3a are correct.
· Your answer to question 1 is partially right. Your data for question 1 is fine, but the X and Y axes are reversed. Price is always the Y-axis and quantity is the X-axis.
· The responses to question 3, 3b and 3c are incorrect. Please visit the following websites to understand why your assumptions which lead you to an Oligopoly are incorrect.
o https://www.eia.gov/energyexplained/index.php?page=oil_where
o https://www.ipaa.org/independent-producers/
· The answer to question 4 is incomplete. While you answered the question about prices, the prompt was “Traders and speculators can buy oil contracts for future delivery. Does this make the market perfect competition?” which was not answered.
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

40 50 60 70 80 90 100 104 103 102 101 100 99 98 40 50 60 70 80 90 100 98 100 102 104 106 108 110
Price per barrel

Quantity of Barrels

Show your work below.

Supply and Demand for ExxonMobil

40 50 60 70 80 90 100 104 103 102 101 100 99 98 40 50 60 70 80 90 100 98 100 102 104 106 108 110
Price per barrel

Quantity of Barrels

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? 3c. Is the oil production industry closer to the oligopoly model or the competitive model? Explain. 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

40 50 60 70 80 90 100 104 103 102 101 100 99 98 40 50 60 70 80 90 100 98 100 102 104 106 108 110
Price per barrel

Quantity of Barrels

Show your work below.

Supply and Demand for ExxonMobil

40 50 60 70 80 90 100 104 103 102 101 100 99 98 40 50 60 70 80 90 100 98 100 102 104 106 108 110
Price per barrel

Quantity of Barrels

Supply and Demand for ExxonMobil

40 50 60 70 80 90 100 104 103 102 101 100 99 98 40 50 60 70 80 90 100 98 100 102 104 106 108 110
Price per barrel

Quantity of Barrels

https://www.eia.gov/energyexplained/index.php?page=oil_where https://www.ipaa.org/independent-producers/

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 decreased by none
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 $ 8,356.200 $ 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 -399.8
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 1,671.2
By how much did profits increase or decline? It has increased by 4
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
Prof Feedback Project 1
Step 3:
· Answers to questions 4-7 are correct
· The answer to question 1 is partially correct:
o The characterization of the elasticity of demand is correct
o The change in revenue is correct
o The amount of profit is incorrect because the revenue amount for the changed quantity and price is incorrect. Revenue = price x gallons sold per day, not average gallons
· The answer to question 2 is partially correct:
o The characterization of the elasticity of demand is correct
o The change in revenue is incorrect. 9587.60 -7916.40 ≠ -399.8
o The amount of profit is correct
· The answer to question 3 is partially correct:
o The characterization of the elasticity of demand is correct
o The change in profit is correct
o The change in revenue is incorrect. 10411.20 -9587.60 ≠ 1671.20
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?