Financial Decision Making _1

Supply and Demand Graph

Future Supply and Demand for Crude Oil

Price per barrel (2208) Daily US demand for crude oil (in millions of barrels per day) Daily US supply of crude oil (in millions of barrels per day)

$25.00 1.0 0.5

$30.00 0.9 0.6

$35.00 0.8 0.7

$40.00 0.7 0.8

$45.00 0.6 0.9

$50.00 0.5 1.0

$55.00 0.4 1.1

Data from https://www.iea.org

Question 1:

Equilibrium:

Question 2

Question 3

Question 4

Question 5

Show your work below.
Oil Supply and Demand

Daily US demand for crude oil (in millions of barrels per day) 1 0.9 0.8 0.7 0.6 0.5 0.4 0 25 30 35 40 45 50 55 Daily US supply of crude oil (in millions of barrels per day) 0.5 0.6 0.7 0.8 0.9 1 1.1000000000000001 0 25 30 35 40 45 50 55

Oil Supply and Demand

#REF! 0 0 0 0 0 0 0 0 0 0 0 0 0 0 #REF! 0 0 0 0 0 0 0 0 0 0 0 0 0 0

To complete this project step, address the following:

1. Based on the information provided from the International Energy Agency (IEA) in the table on the left, examine the supply and demand graph in the space below. This information is helpful for our client ExxonMobil to know how much oil to produce. The graph shows crude oil prices per barrel and the supply and demand for the number of barrels in the united States per day. After you have examined the graph below, identify the price and quantity and price at which equilibrium exists. This information is important for the client to determine the quantity of oil to produce for profit maximization.

2. The global demand for oil changes with the changes in global economies. As economic activity increases, the global demand for oil increases. For the past several years, the global demand for oil has increased (https://www.iea.org/oilmarketreport/omrpublic/). As the global demand changes, we can observe this change graphically. What changes are expected in the short-term? To answer this question, please see https://www.eia.gov/outlooks/steo/. Support your statements with research and references.

3. What are potential supply and demand risks in the global oil market? Support your statements with research and references.

4. Is the global oil and gas market in a monopoly, oligopoly, or competitive economic model? Why? Support your statements with research and references.

Answer in the space below. Be as descriptive as possible and credit any sources you use.
Show your work below.
Show your work below.
To complete this project step, address the following:

1. Based on the information provided from the International Energy Agency (IEA) in the table on the left, examine the supply and demand graph in the space below. This information is helpful for our client ExxonMobil to know how much oil to produce. The graph shows crude oil prices per barrel and the supply and demand for the number of barrels in the united States per day. After you have examined the graph below, identify the price and quantity and price at which equilibrium exists. This information is important for the client to determine the quantity of oil to produce for profit maximization.

2. The global demand for oil changes with the changes in global economies. As economic activity increases, the global demand for oil increases. For the past several years, the global demand for oil has increased (https://www.iea.org/oilmarketreport/omrpublic/). As the global demand changes, we can observe this change graphically. What changes are expected in the short-term? To answer this question, please see https://www.eia.gov/outlooks/steo/. Support your statements with research and references.

3. What are potential supply and demand risks in the global oil market? Support your statements with research and references.

4. Is the global oil and gas market in a monopoly, oligopoly, or competitive economic model? Why? Support your statements with research and references.

5. To what extent do you think that the current Covid-19 pandemic crisis will impact the global oil market in the long run and more specifically are there implication for Exxon Oil?

Be as descriptive as possible and credit any sources you use.
Show your work below.

Profit Maximization

Profit Maximization

Base price of unleaded regular delivered in New York harbor (January 27, 2020) $1.517

Added cost to Cal:

Maryland state gasoline tax (Effective July 1, 2018) $0.353

Federal gasoline tax $0.184

Distribution & Delivery $0.042

Advertising and Marketing to ExxonMobil $0.042

Additives $0.020

Total additions $0.641

Total cost per gallon $2.158

Answer question 1 below.

Quantity Price

4000 2.658

3600 2.758

Average Average

% change % change Elasticity of Demand

Elasticity:

By how much did revenues increase or decrease as a result of the change in price?

By how much did profits increase or decline?

Gallons sold per day Price Revenue (price x gallons) Cost per Gallon Variable Cost (cost per unit x volume) Fixed cost per day Total Cost (Fixed + Variable) Daily Profit (revenue – all costs)

4000 $ 2.658 $ 10,632.00 $ 2.158 $ 8,632.00 $ 438.00 $ 9,070.00 $ 1,562.00

3600

Answer question 2 below.

Quantity Price

3600 2.758

4400 2.558

Average Average

% change % change Elasticity of Demand

Elasticity:

By how much did revenues increase or decrease as a result of the change in price?

By how much did profits increase or decline?

Gallons sold per day Price Revenue (price x gallons) Cost per Gallon Variable Cost (cost per unit x volume) Fixed cost per day Total Cost (Fixed + Variable) Daily Profit (revenue – all costs)

3600

4400

Answer question 3 below.

Quantity Price

4400 2.558

4800 2.458

Average Average

% change % change Elasticity of Demand

Elasticity:

By how much did revenues increase or decrease as a result of the change in price?

By how much did profits increase or decline?

Gallons sold per day Price Revenue (price x gallons) Cost per Gallon Variable Cost (cost per unit x volume) Fixed cost per day Total Cost (Fixed + Variable) Daily Profit (revenue – all costs)

4400

4800

Profit Maximization

Gallons sold per day Price Revenue (price x gallons) Cost per Gallon Variable Cost (cost per unit x volume) Fixed cost per day Total Cost (Fixed + Variable) Daily Profit (revenue – all costs)

2400 $ 3.058 $ 7,339.20 $ 2.158 $ 5,179.20 $ 438.00 $ 5,617.20 $ 1,722.00

2800 $ 2.958

3000 $ 2.908

3200 $ 2.858

3600 $ 2.758

4000 $ 2.658

4400 $ 2.558

4800 $ 2.458

5200 $ 2.358

5600 $ 2.258

6000 $ 2.158

6400 $ 2.058

6800 $ 1.958

7200 $ 1.858

7600 $ 1.758

8000 $ 1.658

8400 $ 1.558

8800 $ 1.458

9200 $ 1.358

Answer question 5 below.

Marginal Revenue Marginal Cost

Gallons sold per day Price Revenue (price x gallons) Marginal revenue Cost per gallon Variable Cost Fixed Cost Total Cost Marginal Cost

2800.0 $ 2.958000 $8,282.40 $2.158 $6,042.40 $438.00 $6,480.40

2800.1 $ 2.957975 $8,282.63 $0.2258 $2.158 $6,042.62 $438.00 $6,480.62 $0.2158

3000.0 $ 2.908000

3000.1 $ 2.907975

3200.0

3200.1

3600.0

3600.1

4000.0

4000.1

4400.0

4400.1

4800.0

4800.1

5200.0

5200.1

5600.0

5600.1

Select One

Price Elastic

Price Inelastic

Unit Price Elastic

Cal Overhaut operates an ExxonMobil gas station franchise in Fitzhugh, MD. The price of gasoline is volatile and varies greatly from day to day. The price per gallon varies based on the seasonal blend of gasoline, which is determined by clean-air requirements. Cal’s pricing options are based on the desired profit margin.

Conventional Gasoline Regular Spot Prices can be found at https://www.eia.gov/dnav/pet/hist/EER_EPMRU_PF4_Y35NY_DPGD.htm.

Cal recently raised the price of regular gas by 1 cent per gallon from $2.658 to $2.758, and his revenue decreased and profit increased. Cal would like you to explain why that happened.

Cal competes with another gas station across the street that typically sells regular gas for 2 to 3 cents per gallon less than his station. They are currently selling gasoline for $2.458 per gallon. Recently, regular gasoline for delivery in New York harbor sold for $1.517 per gallon.

Cal tells you that his gas station has fixed operating costs of about $438 per day.

To the right are the components that determine the cost of a gallon of regular gasoline to Cal’s business. Answer the seven questions below. You are required to use Excel for all calculations.
1. Last week, Cal sold an average of 4,000 gallons per day at an average price of $2.658 per gallon. This week, he raised the average price to $2.758 per gallon, and both revenues and profits dropped. His station is now selling an average of 3,600 gallons per day. Fixed costs of operating the gas station are $438 per day.

What is the price elasticity of demand?
Can the demand be characterized as price elastic, price inelastic, or neither?
By how much did revenues increase or decrease as a result of the change in price?
By how much did profits increase or decline? (Profit is revenue minus total cost.)

6. Next calculate marginal revenue, knowing that it is the difference between the revenue at the price shown and the revenue at 1/400 of a cent less. Calculate 1/400 of a cent as well as the new price.

Calculate the marginal cost of selling zero point one (0.1) more gallon at each price. Prove that MC = $0.2158

Complete the table to the right.
7. What advice can you give to Cal on setting prices to maximize profit?
2. After seeing your analysis, Cal decides to lower the price of gas from $2.758 to $2.558 per gallon. After this change, the volume sold increased to 4,400 gallons per day. He asks you to measure his business gains or losses as a result of this price change. Fixed costs are $438 per day.

What is the price elasticity of demand?
Can the demand be characterized as price elastic, price inelastic, or neither?
By how much did revenues increase or decrease as a result of the change in price?
By how much did profits increase or decline? (Profit is revenue minus total cost.)
3. After seeing the result (from question 2), Cal decides to lower his price once again from $2.558 to $2.458 per gallon. Once again, volume sold increases and settles at 4,800 gallons per day. He is worried that any further price cut will cause the discount station across the street to also lower it price.

What is the price elasticity of demand?
Can the demand be characterized as price elastic, price inelastic, or neither?
By how much did revenues increase or decrease as a result of the change in price?
By how much did profits increase or decline? (Profit is revenue minus total cost.)
4. Cal’s son is studying in the MBA program at UMUC. He tells his father that profit maximization occurs when marginal cost (MC) = marginal revenue (MR). Cal understands that his marginal cost is the same as his variable cost, or $2.158 per gallon. Technically, marginal cost is the added cost from selling one more gallon.

Cal asks you for a chart to show how profits vary with sales volume, assuming that he sells an additional 400 gallons for each 10 cent decrease in price. Also, he wants to know by how much he can lower his price without losing money.

Given that you know the price and quantity of gallons sold so far, and that Cal’s cost per gallon is $2.158 per gallon and his fixed cost is $438 per day, complete the table to the right.
5. Once you calculate total profit, what is the profit maximizing price?