Optimizing Oil Production: Analysis of Cost Structures

Explanation:

Cost Structures:

When analyzing the cost structures of the three oil producers - Fossils R Us, Green House Oils, and Shale Ale Plant, it is crucial to consider their plant and property costs, extraction costs per barrel, and daily production capacities.

  • Fossils R Us: Plant and property cost is $900,000, extraction cost is $45 per barrel, with a production capacity of 100,000 barrels per day.
  • Green House Oils: Plant and property cost is $1,500,000, extraction cost is $31 per barrel, with a production capacity of 140,000 barrels per day.
  • Shale Ale Plant: Plant and property cost is $1,000,000, extraction cost is $40 per barrel, with a production capacity of 80,000 barrels per day.

Production Analysis:

In the short run, oil companies will continue to operate as long as the selling price is higher than the variable production costs, i.e. marginal revenue ≥ marginal costs. Therefore, if the current price for a barrel of oil is $42, only Green House Oils and Shale Ale Plant will continue to operate since their production costs are lower than the selling price. Total production for both Green House Oils and Shale Ale Plant = 140,000 barrels + 80,000 barrels = 220,000 barrels per day.

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