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i did not understand the marginal capacity concept and how we did the calculation ! can anyone please help.thx

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Hello Gaelle,

I agree with you, the case is not clear at all. I will try to explain you how you can interprete the text.

First of all, let's assume that the oil demand is fixed 50M m^3 per year.
In order to supply this amount of oil, there are 3 kinds of tanker that you could use: small, medium and large.
Now we have to understand the following: what will be the equilibrium price of the market? Since there is a lot of competition and there is an overcapacity, we can assume that the price will be really low. We can try to estimate it calculating the "Cost based" price, the minum price that the tankers have to set up in order to cover operating costs.
Let's start calculating what is the capacity of the large tankers, that are the cheapest way to transport oil (in terms of operating cost / m^3 carried).

The result is that large tankers can transport up to 40M m^3 of oil. What about the other 10M m^3 of oil? Again, since we want to see what is the minimum price that covers operating costs, we will assume that medium tankers will be used, cheaper than the small ones.

Using medium tankers, the cost is 150000 $ for 200,000 m^3 --> 75,000$ per 100,000m^3. The latter is the minimum price that you can find on the market that we assume as equilibrium price (the hypothesis is that large tankers are gonna set up their price at this level to cut off competitors).

Using this price you can then calculate the profitability of each type of tanker.

Does it make sense?

Luca

Hello Gaelle,

I agree with you, the case is not clear at all. I will try to explain you how you can interprete the text.

First of all, let's assume that the oil demand is fixed 50M m^3 per year.
In order to supply this amount of oil, there are 3 kinds of tanker that you could use: small, medium and large.
Now we have to understand the following: what will be the equilibrium price of the market? Since there is a lot of competition and there is an overcapacity, we can assume that the price will be really low. We can try to estimate it calculating the "Cost based" price, the minum price that the tankers have to set up in order to cover operating costs.
Let's start calculating what is the capacity of the large tankers, that are the cheapest way to transport oil (in terms of operating cost / m^3 carried).

The result is that large tankers can transport up to 40M m^3 of oil. What about the other 10M m^3 of oil? Again, since we want to see what is the minimum price that covers operating costs, we will assume that medium tankers will be used, cheaper than the small ones.

Using medium tankers, the cost is 150000 $ for 200,000 m^3 --> 75,000$ per 100,000m^3. The latter is the minimum price that you can find on the market that we assume as equilibrium price (the hypothesis is that large tankers are gonna set up their price at this level to cut off competitors).

Using this price you can then calculate the profitability of each type of tanker.

Does it make sense?

Luca

thank you so much it is very clear now !! — Gaelle on Jan 20, 2020

With a fixed demand of 65m m³ ceteris paribus, shouldn`t be the market clearing price $ 50,000 per 100,000 m³ oil? — Maxi on Jan 14, 2021

5m tons will be provided by half of the small tankers... — Maxi on Jan 14, 2021

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