Question

A large crude oil producer in the Middle East asks you to help the company find the revenue-maximizing output of crude oil. The firm provides you with five years of monthly data of price and customer nominations (customer nominations refer to customers’ indicating how much crude oil they would like to buy at the particular price).

A) Carefully explain how you would answer this question. Be sure to explain what you are trying to measure, what data you will use, how you identify the demand function, and what empirical tests you run.

B) You notice that in some months both nominations and price are higher than in other months. Explain why this is not a violation of the law of demand.

C) The crude producer also wants to know if its crude oil competes with Australian coal. How would you answer this question?

Answer 1

(a) To find the revenue maximizing output not only customer nominations are required but also the seller nominations are also required.

As where the demand meets the supply is the point where firms can get the maximum revenue.

Here, demand function can be derived from the customer nominations as demand function indicates the quantity demamded at given price.

And also, to clearify ceetain standards of demand needs to cross check.Among that one is the negative relation of quantity demanded and price.

(b)If the prices and demand both are high and law of demand is not violated then where is the situation of exception of law of demand.

They are:

• giffen goods: these are the goods that are inferior to the luxury or normal goods
• veblen goods :these are the goods that have article of distinction which means if the prices increases goods are also more demanded.
• and expectation of price change : this means in the future if there is chances of increase in the prices due to any of the situation of economy whether it rises or not but its demand rises in the present

so, here is the chance of third option that in future there is situation of hike in prices may be due to shortage of crude oil which make the increase in demand even at higher prices.

(c) us crude oil can complete Australian coal as coal is the single product but two royal itself contains many product with itself which make it more variable even more demanding than the coal.

so, yes it can compete the coal .