Consider given figure, which shows what a cartel can do if it can act as a monopolist. In Figure, the cartel supplies the entire world market.
a. What is the effect on the cartel's profit-maximizing price if a new outside source of supply now develops that can provide 10 million barrels of oil per day at any price above $5 per barrel? Show the effect using the graph.
b. Instead of the new outside source described in question a , consider instead a new outside source of supply that will provide amounts of oil that vary with the world price, according to the following schedule:
Outside supply (millions of barrels per day) 5 (World price 2 5)/2 (For instance, if the world price is $15, the outside supply is 5 million barrels per day.)
Show graphically and explain the effect on the cartel's profit-maximizing price of this new outside supply source.
