The first step is to create the marginal cost curve for the country. A
producer -- either a competitive producer or a monopolist -- will always start
with the lowest-cost option before moving to the next-least-cost option, and
so forth. Ranking the fields from least costly to most costly, and adding
the production capacities, we have the marginal cost curve:
| Field | Production capacity (million barrels per day) | Marginal cost ($/barrel) |
| Baath Bonanza |
0 - 3 | 20 |
| Fediyah |
4 - 5 |
30 |
| Saddam Yankee |
6 |
40 |
| Marqi al Sadr |
7 - 8 |
50 |
| Heavyweight |
9 - 18 |
70 |
1. The demand curve for Iraq (excess demand) starts with a quantity of zero
at a price of $100/barrel. At a price of $70 per barrel, quantity demanded
is 15 million barrels/day, which is equal to marginal cost (Heavyweight)
which will have to be brought into production to get production up to 15
million barrels/day. All fields except Heavyweight are at full production,
while Heavyweight produces 7 million barrels/day. Profits from each field
are calculated by subtracting each field's marginal cost from $70 and multiplying
by the number of units produced by that field.
2. Rounding off to million barrels per day, the marginal revenue curve starts
at $98 for 1 million barrels per day, and falls by $4 for each additional
million barrels per day sold. This is calculated by multiplying price by
quantity from the demand curve at each level of production, and then looking
at how much total revenue changes with each increasing level of production.
Marginal revenue falls to $66 at a quantity of 9, which is less than marginal
cost ($70). So a quantity of 8 maximizes profits. The price at 8 is $84.
If you do not round off to the nearest million barrels per day, you will
get slightly different numbers for the marginal revenue curve, but the same
answer for the price and quantity where MR = MC. All fields except Heavyweight
are at full production; Heavyweight produces zero. Profits from each field
are calculated by subtracting each field's marginal cost from $33 and multiplying
by the number of units produced by that field.
3. Now the marginal revenue curve starts at $73 for 1 million barrels per
day, and falls by $4 for each additional million barrels per day sold. Marginal
revenue falls to $49 at a quantity of 7, which is less than marginal cost
($50). So a quantity of 6 maximizes profits. The price at 6 is $63. Profits
from each field are calculated by subtracting each field's marginal cost
from $63 and multiplying by the number of units produced by that field. Now
Marqi al Sadr and Heavyweight both produce zero.