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FIN 574, Microeconomics for Business

Fall 2025

High-Engagement Team Assignment 2 (Module 4) (50 points)

Please do not share with anyone else. Distribution of this document to other
students or sharing of this document through any distribution channels is a
violation of the University of Illinois Student Code.

Team Name:

Insert Team Name Here

Team Member Contributions:

Team Member Name Briefly describe team member’s contribution to

this assignment
Alice Hsueh Question 3
Brian Lee Question 2
Ding Kang Liu (Wynntor) Question 2
Sreeparvathy Radhakrishnan Nair Question 1
Salwa Shaukat Question 3
Riley To Question 1

Please reach out to [email protected] if you experience any difficulties in collaborating with
your assigned team members or if a team member does not contribute to an assignment.

Directions:

Please follow all directions provided in Canvas for submission of this assignment.

This is a team assignment, so you must work with your assigned team to create one MS Word
or PDF file in response to the questions in the attached document. One member of each team
will submit your MS Word or PDF document for the whole team. No other formats will be
accepted. Please make sure that your file does not exceed 10 MBs in size.

As with all other assignments, please utilize well-executed, clearly constructed graphs where
requested. Please remember to:
 Label all axes
 Label all lines/curves
 Indicate direction of the shift(s) in curves with arrows, as appropriate.
 You do not have to indicate the intercepts for the curves for this assignment.

This assignment consists of 3 (three) questions. Please make sure that you complete all
of them. We suggest that you utilize Excel for completing this assignment; and then
transfer your graphs and insert appropriate narratives into this Microsoft Word template
(and print it, as necessary, to PDF).

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Setting: Applicable to All Questions

Consider Brockland, a medium-size nation that both produces and consumes oil and does not
either export or import oil from other countries.
As a result of Brockland’s industrial policy, its oil extraction and refining sites (30 plants located
in North, East, South-East, South, and Central regions of the country) are all separately owned
and are highly competitive in the provision of oil to its consumers. The plant information is
shown in the Excel document associated with this assignment. The document also provides the
plant capacity (in thousands of barrels of oil per day); the marginal cost (MC) of extraction
and refining; and indicates whether the extraction technology used is either conventional
(typically, less expensive) or non-conventional (shale oil extraction, typically more expensive).
You can also assume that the marginal cost (MC) of extraction and refining is constant for the
purposes of your analysis throughout the productive capacity of the plant; and thus, MC is the
same as the average variable cost (AVC).
The demand for oil in Brockland is relatively stable. The initial demand equation can be
approximated by Qd = -15P + 1,285.
Question 1 (15 points)
Using Excel, create a graph that clearly shows demand and supply for oil in Brockland, and
determine the equilibrium quantity and price.
Helpful Hints:
Use the marginal cost and quantity data to graph your supply curve, assuming that the
individual plants will be willing and able to produce oil if the market price is at least equal to their
marginal cost of extraction and refining. You can assume that the transportation costs are
already included in the marginal cost figures.
You have enough information in the Excel table to determine the Quantity Demanded and
Quantity Supplied that are required to create the two curves. In determining quantity supplied, it
might be useful to sort your data by cost (from lowest to highest) and then create a formula for
determining the quantity supplied as your costs (and prices) increase.
For example, if you sorted your initial data by marginal cost (MC), you can recognize that no
plants will operate if the price of oil is below $12 per barrel. At the price of $12, however, Plant
S1 will enter the marketplace, and Qs will be equal to the plant’s capacity of 60 (60,000 barrels
per day), while all other plants will remain shut down. When the price rises to $14, Plant S10 will
also enter the market and both Plants S1 and S10 will operate, producing Qs=60+70=130 units
or 130,000 barrels per day).
 Make sure that you appropriately label your axes and include legends for your curves.
Please recall that your Q should be on the x-axis and your P should be on the y-axis, per
standard convention in economics.
 Insert the graph below (copy and paste from Excel). Please scale the graph as
appropriate to show detail clearly.m
 What are the equilibrium quantity and price of oil in Brockland? How many plants
operate to produce oil, and how many plants will shut down in the short run? Why? What
types of plants primarily remain shut down, and why?

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The equilibrium price of oil in Brockland will be around $33per barrel and at this price,
the quantity of oil demanded and supplied is about 790,000 barrels per day. From this,
we can understand that the market is balanced, and producers are willing to sell exactly
the amount buyers want to purchase at this price. Out of the 30 plants, 15 plants operate
because their production costs (marginal cost) are less than or equal to $33 per barrel,
so they can make a profit or at least they can cover their costs. These are mostly the
conventional oil plants located in the South and Central regions, which are cheaper to
run. The other 15 plants shut down temporarily because their costs are higher than $33,
so production would cause losses. Most of these are the shale oil plants or some higher
cost conventional plants in the North and East regions. In the short run, plants that can’t
cover their cost stop producing to avoid losing money. This happens because in a
competitive market, only the plants that can produce at a lower cost keep running when
prices are not very high.

Equilibrium quantity is 790,000 barrels and equilibrium price is $33.

Question 2 (15 points)

Now, suppose that as population and incomes grow, demand for oil increases, and can now be
approximated by the demand function Qd = -10P + 1,545.
Using Excel, create a graph that clearly shows (new) demand and (unchanged) supply for oil in
Brockland, and determine the equilibrium quantity and price.
 Make sure that you appropriately label your axes and include legends for your curves.
Please recall that your Q should be on the x-axis, and your P should be on the y-axis,
per standard convention in economics.

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 Insert the graph below (copy and paste from Excel). Please scale the graph as
appropriate to show detail clearly.
 What are the equilibrium quantity and price of oil in Brockland? As demand increased,
how many plants will now operate to produce oil, and how many plants will remain shut
down in the short run? Why? What types of plants primarily remain shut down, and why?

The new equilibrium quantity is 1,115,000 barrels per day, and the equilibrium price is $43 per
barrel. As demand increased, a total of 26 plants are now operating to produce oil, while only 4
plants remain shut down in the short run. This is because the market is now willing to pay more
for each barrel of oil, which means the plants that were previously losing money can now
produce at a profit or at least break even. The equilibrium price settles at $43 per barrel,
indicating that plants with a marginal cost less than or equal to $43 are now willing to enter the
market and produce oil. The four plants that remain shut down primarily consist of shale
extraction types due to their higher cost extraction method. These plants would still operate at a
loss if they produced oil at $43 per barrel, so it is best for them to remain shut down.

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Question 3 (20 points)

This question builds on Questions 1 and 2 and assumes that the demand curve is as described
in Question 2, Qd = -10P + 1,545.
Additionally, due to a considerable improvement in shale oil extraction technology, the shale oil
plants (3 plants in the South-East, numbered SE1 through SE3; and 4 plants in the East,
numbered E1 through E4) are able to reduce their respective marginal costs by 50% and
increase capacity by 200% (triple the capacity, essentially). For example, for Plant SE2, the
marginal cost was $33 per barrel with capacity of 25 (25 thousand barrels per day); now, these
become an MC of $16.50 per barrel and capacity of 75 (75 thousand barrels per day).
Using Excel, create a graph that clearly shows the demand curve from Question 2 and the new
supply for oil in Brockland, and determine the equilibrium quantity and price.
· Make sure that you appropriately label your axes and include legends for your curves.
Please recall that your Q should be on the x-axis and your P should be on the y-axis, per
standard convention in economics.
· Insert the graph below (copy and paste from Excel). Please scale the graph as
appropriate to show detail clearly.
· What are the equilibrium quantity and price of oil in Brockland? As supply changed, how
many plants will now operate to produce oil, and how many plants will remain shut down
in the short run? Why? What types of plants primarily remain shut down, and why?

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