1. For OPEC to act in accordance with this model, what fundamental change in OPEC would have to occur? What factors prevent it?
First of all, all OPEC members must agree on the desired output level and price. The initiative for price and output decisions has to be turned to some assigned cartel authority and all members have to comply with this body. Therefore, the OPEC members can no longer make any independent price and output decisions on their own. An important attribute of this model is the absence of disputes among the cartel members on the basis of the optimal price and output for each member. However, several factors will prevent this form of cartel of taking place in the OPEC. First of all, each OPEC country maintains control over its own production and there are serious doubts that the OPEC members would want to assign the price and output decisions to some central authority. Secondly, even side payments to high-cost producers from low-cost producers to induce the former to reduce their production are impractical because they are so costly to negotiate and enforce. Finally, the OPEC nations have traditionally eschewed any production controls, viewing their production decisions as sovereign national matters.
2. Why is this form of cartel likely to be the most durable?
This form of cartel maximizes the joint profits of its members and is completely insulated from internal cheating tendencies. Members may disagree as to the cartel's assignment of profit shares, but there is no conflict as to total output and the plants from which output is produced. As a result, under this form of organization the cartel's central body extracts the maximum possible monopoly profits from buyers and avoids the defects usually fatal to real-world cartels.
3. Using equation (4.4), show that the third cartel member, with a 20 percent market share, also desires the same monopoly price Pm.
P3 (1-1/Ed3)=Pm (1-1/Edm)
4. Suppose the second cartel member had long-run marginal production costs twice as high as those of other members. What price and output would it prefer? In view of the above discussion of Venezuelan and Indonesian costs, does this help explain why they usually favor high prices?
It would prefer higher price and higher level of output, as it needs to recover its marginal costs and maximize it profits. I believe it provides a good explanation why Indonesia and Venezuela have traditionally favored higher prices due to the fact that they have had considerably higher costs comparing to other OPEC members.
5. What combinations of OPEC countries are likely to have particularly strong or weak mutuality of interests? Be careful to distinguish between those based on economic and political similarities.
The Persian Gulf Producers of OPEC have particularly strong mutuality of interests comparing to Non-Persian Producers based on the reserve life expectancy ratio. In other words, members with huge reserves, in our case it's Persian Gulf Producers, have quite similar interests in the longevity of the cartel; while other members with small reserves, in our case it's Non-Persian Producers, may be unconcerned about cartel stability beyond a horizon of perhaps 10 to 15 years, after which their reserves will be substantially depleted.
6. Does the rather homogeneous nature of oil compared to, for example, autos, make the cartel more or less stable? Does the fact that competitive responses are limited entirely to price variation facilitate or weaken the tendency to cheat?
Given the fact that all producers have assigned market shares, face identical costs and share common perceptions about the elasticity of demand facing each producer; and, as a result, they select price corresponding to the output where marginal costs equal marginal revenue, the homogenous nature of oil makes the cartel more stable. The fact that competitive responses are limited entirely to price variation facilitates the tendency to cheat, as higher prices bring higher revenues.

1. The more rapid the rate of growth in demand and oil consumption, the more rapid will be the rate of depletion. By moving the date of exhaustion toward the present, the user cost is increased, leading to a higher marginal cost and a higher monopoly price. From the hybrid model, we know that the cartel core acts as a residual supplier therefore it is likely to be the prime beneficiary of economic growth, slower the growth means greater excess capacity and greater incentives for the cartel core to seek demand growth via lower prices.

2. Factors :
• Reduction in energy availability
• Long term trends in the rate of technical progress as evidence for sustained long run economic growth and we might not have any progress of that sort which can slow the growth rate of the economy
• Declining growth in the labor force will lead to lower growth in real GNP which could alone reduce the overall growth rate by 5%

3. 1. More rapid growth rate in demand will lead to an increase in user cost, which leads to higher marginal cost and higher monopoly (OPEC) price which will eventually lead to a rapid rate of depletion, the cartel core being a residual supplier will have a strong output for a short period of time but then it will drop due to the depletion which is not favored by the cartel core 2. Once again, the cartel core being a residual supplier, would rather have a lower growth rate in prices because if prices remain constant over time, oil consumption tends to grow over time.

1. MC = MR is the profit maximizing conditions, producers wish to make as much money as they can and to do so their marginal cost must be equal to their marginal revenu and using the intersection between the marginal cost and marginal revenu will be the level at which the price must be set to respect the profit maximizing theory.

2. 2.P/m=1/1-(1/Eopec)=Eopec/Eopec-1

10=10/9=1.1
5=5/4=1.25
2=2/1=2
1.5=1.5/.5=3
1.1=1.1/0.1=10

We cant divide by zero or a negative
When setting the prices the industry must be aware that their decisions in the short run will ultimately effect the long run demand. If the bar is set to low or to high there could be price shocks which could be very costly to the oil industry.

3. In that period, supply was less then demand so that contributed to the jump of the import rates, the 20% increase in the US demand definitely contributed to an higher import rate, therefore sending a signal to the exporting countries, making the prices increase even more.

4. The cartel core is interest in its long run market prospects, the effect after 20 years of a real price increase was to reduce consumption by 19.5 MMB/D, given that the cartel core’s production is only a fraction of OPEC’s total, the lost of 19,5 MMB/D in demand for a 66% price increase might actually lower the cartel core’s long-run revenues. Which leads us to the fact that even though the world price elasticity of demand is inelastic at 0.7, the corresponding demand elasticity facing the cartel core may be elastic.

1. The best buyer response is not to buy from OPEC individually because when one country buys from OPEC overall demand elasticity is relatively small, therefore some form of combined action involving the largest 8-10 importers appears necessary to place maximum pressure on OPEC.

• 1. To coordinate tariff policies to minize OPEC price increases. By putting a 10$ levi per barrel imports the effects on the long run will be on both producers and consumers depending on elasticity, ultimately lowering the OPEC price shifting a portion of the tax to OPEC.
• Valorem Tariff. Sets a percentage of the OPEC price. The advantage of the valorem tariff is to provide additional pressure on OPEC to lower prices.
• The problem with the tariffs are that no country would want to impose higher energy prices on their own producing industries, and maybe in long-run prices would be lower, but in the short-run the effects of tariffs would be an increase in price and political resistance would be very strong and many countries would not cooperate to such a program.

• 2. Import tickets. Import tickets would be sold to foreign suppliers at public auction, the winning bidder is discounting his imported oil by the amount of the bid. Advantage : Joint country action is not necessary for the implementation of this program. The forces tending to lower prices work through the game theory results and the incentive to cheat.
• Issues : Can the winning bidder be identified and their bid prices ascertained. Even is cheating were undetected and prices fell for a time responses by OPEC could be anticipated.

• 3. Subsitutes for OPEC oil. If technologies can be developed the cost of synthetic oil can be brought down overtime, this could be a very effective strain on OPEC monopoly power.

The last solution would be the more feasible because creating a substitute would be the likely “problem solver” due to the fact that advances in technology are possible which therefore decrease OPEC’s monopoly power without bringing any more issues to the table.

2. The revelance of the free rider phenomenon is that regardless of how much the overall cost of creating the deal is the free rider will get the same deal regardless of how much they contribute to the operation. In other words, the results will not depend on their contribution of the free rider.