MPE781 Economics for Managers - Assignment Task 1

Description

The assignment provides you with an opportunity to conduct research on/analyse problems related to contemporary economics issues. You will need to apply the existing economic theories to develop a consistent argument with good reasoning while evaluating the given problem set critically. 

Specific Requirements 

Your assignment submission should start with a cover page in which all the following information should be provided: your full name, student ID and the total word count. Please note that the followings are excluded from the word count: cover page, footnotes, references, tables, figures and appendix (if any). 

Following the cover page, please provide your answers to the four questions below. Note that all these questions are compulsory.

Learning Outcomes

This task allows you to demonstrate achievement towards the unit learning outcomes. The ULOs are aligned with specific graduate learning outcomes – that is, the skills and knowledge graduates are expected to have upon completion of their studies – and this assessment task is an important tool in determining achievement of those outcomes. 

If you do not demonstrate achievement of the unit learning outcomes, you will not be successful in this unit.  It is good practice to familiarise yourself with the ULOs and GLOs as they provide guidance on the knowledge, understanding and skills you’re expected to demonstrate upon completion of the unit. In this way they can be used to guide your study.

 Question 1 [12 marks]

Assume for now that the Organization of Petroleum Exporting Countries (OPEC) consists of 10 exactly similar members and that they are the only oil producers in the world with the following world’s demand function and marginal cost function:

                         The marginal cost function (or the global oil supply function): MC=10+Q.
                         Function of the world’s demand for oil: Q=100-P or equivalently P=100-Q
where MC, P, Q denote marginal cost, price, and oil production quantity in million barrels/day, respectively.

First, show that given the world’s demand for oil: Q=100-P or P=100-Q, the marginal revenue has the following function: MR=100-2Q.

Please identify the equilibrium price and oil production quantity under two following scenarios:
Scenario 1: OPEC successfully coordinates the production of its members and behaves like a cartel.
Scenario 2: OPEC members behave like individual sellers and each member by itself was so small relative to the overall market that it cannot affect the oil prices in the world market.
Please compute the profits of OPEC members in Scenario 2.

Question 2 [6 marks]

Compute the surplus of oil consumers, the surplus of OPEC oil producers and reduction in the welfare of the society as a whole when OPEC members successfully coordinate their oil production to behave like a cartel.

Question 3 [10 marks]

A Representative OPEC Member

Figure 2 presents the marginal cost (MC*) and the average cost functions for a representative OPEC member. Note that Figure 2 is consistent with the graph of the global oil market in Figure 1.

Using Figure 2, please graphically identify the equilibrium price, oil production quantity, and profits of the representative OPEC member in the two scenarios as described in Question 1.

Use Figure 2 to illustrate why an OPEC member always has an incentive to cheat or not to respect his oil production quota.

Question 4 [12 marks]

Read Article 1 “Could an OPEC deal mark the beginning of the end of cheap oil?” at the end of this assignment (pages 7 and 8). Note that the questions below are about the real global oil market and real behaviour of OPEC and its members in this market.

Please answer the following questions:

What is specifically the “pragmatism” by Saudi Arabia that is mentioned by the article? Why do you think that it is smart, or it is not smart for Saudi Arabia to adopt this strategy of “pragmatism” toward other OPEC members or/and non-OPEC major oil producing countries in the context of global oil market as described in the article? Please be elaborate as much as possible in your answer.

End of the assignment questions

Submission

You are to submit your assignment in the individual Assignment Dropbox in the MPE781 CloudDeakin unit site on or before the due date. 

When uploading your assignment, name your document using the following syntax: <your surname_your first name_your Deakin student ID number_[unitcode].doc (or ‘.docx’). For example, ‘Jones_Barry_123456789_ABC123.doc’. 

You must keep a backup copy of every assignment you submit, until the marked assignment has been returned to you.  In the unlikely event that one of your assignments is misplaced, you will need to submit your backup copy.

Any work you submit may be checked by electronic or other means for the purposes of detecting collusion and/or plagiarism.

When you submit an assignment through your CloudDeakin unit site, you will receive an email to your Deakin email address confirming that it has been submitted. You should check that you can see your assignment in the Submissions view of the Assignment Dropbox folder after upload, and check for, and keep, the email receipt for the submission.