Consider the oil-producing countries of A, B, and C. Each has a marginal cost of zero. World demand is given by Q = 995 – P. Suppose the three countries form a cartel, and that none of them has an incentive to deviate from the cartel. By how many units lower is the total output of oil under the cartel relative to the Cournot solution?

248.75 units

Explanation:

world demand ( Q ) = 995 - P

marginal cost of each country = 0

Determine how much less oil is produced under the cartel arrangement in relation to the Cournot solution

under the Cournot model solution

Total output = 3 [ (995 – 0) / ((3+1)*1) ]

                     = 3 * ( 995 / 4 ) = 746.25 units

Considering the cartel arrangement

MR = MC = 0

995 - 2Q = 0

∴ Q = 995 / 2 = 497.5 units

Therefore the difference between oil produced under the cartel arrangement and the Cournot solution

= 746.25 - 497.5

= 248.75 units