I have decided to offer extra credit in connection with Class Problem 6.1.  If you take me up on my offer, then you can earn up to 20 extra points which will be added to your lowest problem set score in ECO 5315.  

The questions to answer for this extra credit assignment are as follows:

  1. Suppose that the pipeline operation of the oil company described in Class Problem 6.1 has total daily fixed costs of $1,000. If the optimal level of horsepower usage is chosen, what is the maximum daily profit that the firm can earn from its pipeline operation? (hint: note that since the market for oil is perfectly competitive, this implies that price equals marginal revenue; i.e., P = MR).
  2. Show that marginal revenue (MR) is equal to marginal cost (MC) in this problem. (hint: note that the definition for the marginal expenditure of horsepower, MEH, is MEH MC(MPH) = $30).

In this problem, I defined Q as the throughput per day in the firm’s pipeline.  Just to be clear, by the term “throughput”, I mean the amount of crude oil carried daily through the firm’s pipeline.

The due date for this extra credit assignment is Thursday, October 29.  Submit your work either as a file attachment in an email addressed to eco5315@gmail.com, or by fax to 253-793-0337.  Good luck!

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