2. Problems and Applications Q2 The New York Times (Nov. 30, 1993) reported that "the inability of OPEC to agree last week to cut production has sent the oil market into turmoil . . . [leading to] the lowest price for domestic crude oil since June 1990." Statements True False The members of OPEC were trying to agree to cut production so they could raise the price. OPEC was unable to agree on cutting production because each country experiences different production costs. The newspaper also noted OPEC's view "that producing nations outside the organization, like Norway and Britain, should do their share and cut production." What does the phrase "do their share" suggest about OPEC's desired relationship with Norway and Britain? OPEC would like Norway and Britain to act competitively. OPEC would like Norway and Britain to keep their production levels high. OPEC would like Norway and Britain to join the cartel.

In the short run, crude oil is inelastic which means that in the short run, increase in price will result in an increase in the revenue of crude oil. By cutting production, this will lead to the decrease in supply, thereby increasing the price and also increasing their revenues.

b) False

OPEC consists of many nations, and therefore creating a unified policy among the different countries, with possibility of competing interests, is not easy to do. OPEC was unable to agree on cutting production because the countries and an incentive to cheat on the agreement. The oil market eventually went into turmoil as as result of reduction on prices due to increase in production.

c) The phrase "do their share" illustrates that OPEC wants Britain and Norway to adopt its policies in order for the policies to be more effective. If OPEC cuts production and Norway and Britain increase production, then OPEC's goal of revenue increase would not be achieved.