3. GWEE is hired by Cartel Oil to conduct a dynamic analysis for profit maximizing in the short-run and the long-run (you can treat this as effectively two periods). Your research estimates total oil demand for the two periods and total income/GDP. Cartel Oil provides you with their level of reserves, marginal cost, and their cost of capital (interest rate) Qd = 200 – 1/3 P + Y, R = 250, GDP or Income (Y) = 70 and does not grow, Interest rate (r) = 10%, and TC = 60Q. a. Estimate the level of production and price in each period if Cartel Oil produced in a competitive environment. What is the optimal price, level of output, and profit? Show the situation graphically. b. Estimate the level of production and price in each period if Cartel Oil behaved as a monopolist. What is the optimal price, level of output, and profit? Show the situation graphically. c. Explain intuitively the differences in a. and b. with an emphasis on the dynamic behavior. d. Suppose that income/ GDP increase by 10% in the 2nd period. Redo your calculations in a. and b. Show the two situations graphically. Explain intuitively
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