Answer to Question #151394 in Microeconomics for Amal Al-Shawarby

Question

Suppose that an oil shale well costs $8 million. The desired revenue of $12 million recoups the investment, provides a return on the investment, and pays for operating costs. The well produces 60 percent of its output in year 1, 25 percent in year 2, and 15 percent in year 3. What would be the minimum output of the well in Bpd to generate $12 million if oil is sold for $100 per barrel?

Answer 1

If oil is sold for $100 per barrel, and we need to generate $12 million in total revenue, then the minimum output of the well is $Qmin = TR/P = 12,000,000/100 = 120,000.$