Answer to Question #123703 in Economics of Enterprise for Aj

Question

TEXplor has purchased a 2-year lease on land adjacent to the land leased by Clampett. The land leased by TEXplor lies above the same crude oil deposit. Assume

EXAMINERS: DR. AGYAPOMAA GYEKE-DAKO, DR. AMIN KARIMU AND DR. WILLIAM BEKOE PAGE 2 of 4 each company sinks wells of the same size at the same time. If both companies sink wide wells, each will extract 2 million barrels in 6 months, but each company will receive profit of only GHC 1 million. On the other if each company sinks a narrow well, it will take a year for Clampett and TEXplor to extract their respective shares, but their profits will be GHC14 million apiece. Finally, if one company drills a wide well while the other company drills a narrow well, the first company will extract 3 million barrels and the second company will extract only 1 million barrels. In this case, the first company will earn profits of GHC 16 million and the second company will actually lose GHC 1million.

1. Illustrate this using a normal form game.

Answer 1

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