M6D1: Sweet versus Sour INSTRUCTIONS When preparing for your

M6D1: Sweet versus Sour

INSTRUCTIONS

When preparing for your discussion post on this case, it is recommend you read through it several times.

• Read through it the first time to familiarize yourself with the case.
• On the second read, consider your assigned role in the situation, and let that guide your perspective. Look deeper at the details: facts, problems, organizational goals, objectives, policies, strategies.
• Next, consider the concepts, theories, tools and research you need to use to address the issues presented.
• Then, complete any research, analysis, calculations, or graphing to support your decisions and make recommendations.

BACKGROUND

Chapter 11 in the text covers price discrimination and other basic pricing strategies firms use in conditions of monopoly, monopolistic competition, and oligopoly, and the conditions under which each type of strategy is feasible. Chapter 12 focuses on the economics of information, including the importance of uncertainty and a manager's efforts to quantify expectations. In this discussion, you will examine the complications uncertainty and asymmetric information add to managerial decision-making. Often, managers have imperfect information about demand functions, costs, sources of products, and product quality. Decisions are complicated by uncertainty. If information is probabilistic in nature, it is advisable to form an expectation of the mean, variance, and standard deviation of outcomes that will result from alternative actions. A manager facing a decision to choose among risky projects must evaluate the risks and expected returns of the projects and then to document this evaluation using mean-variance analysis, which can be similarly applied in assessing this discussion situation. In applying these tools contextually, you will better understand how a manager uses economic analysis in making optimal decisions. 

Oil from different geographical locations will have unique properties; across regions oils vary in their viscosity, volatility, and toxicity, for instance. Light sweet grades can be processed with far less sophisticated and energy-intensive processes and refineries. A West Texas field considered here would be expected to produce West Texas Intermediate light sweet crude oil, while a Wyoming well would be expected to produce high-sulfur sour crude. Crude oils that are light are usually priced higher than heavy, sour, or sulfur-rich crude oils, in part because gasoline and diesel fuel, which often sell at a significant premium to residual fuel oil, can usually be more easily and cheaply produced using light, sweet crude oil. Producers and refiners often mix grades to achieve specific blends, and prices for each component can rise or fall to reflect current demand and supply, although all varieties of oil have a relatively low elasticity of demand given that few available substitutes exist.

DISCUSSION PROMPT

For purposes of this discussion, assume that you are a manager of an oil extraction firm currently considering two projects. As a manager, you consider yourself to be risk-averse. The first project involves extending licenses to drill in an area of Wyoming that geologists estimate will produce up to 1 million barrels of crude oil. The second project, based in Texas, involves expanding existing wells, which are producing at a rate of 2 million barrels per month. The firm's economists predict that there is a 10 percent chance of a recession and a 90 percent chance of an economic boom. During a boom, the first project is forecasted to lose $10,000, whereas existing operations will continue to earn. $20,000. During a recession, however, the Wyoming field is projected to earn $12,000 while existing fields will lose $8,000. If the alternative is earning $3,000 on a safe asset (say, a Treasury bill), what would you do? Would you choose to expand current production by extending operations to include both projects? Would you instead concentrate on a single project? Would you instead invest in a safe asset? Why?

Document your evaluation using mean-variance analysis. Begin by summarizing the available information to document the relevant alternatives, using a tabular form such as this:

Summarize these and other factors that are essential to your decision, verbally, and using graphical representations as you find these to be applicable.

TASKS

You are the risk-averse manager of an oil extraction firm currently considering two projects. With consideration of the possible gains and losses for each project, you must decide:

1. Would you choose to expand current production by extending operations to include both projects?
2. Would you instead concentrate on a single project?
3. Would you instead invest in a safe asset?

Explain your choice(s). 

Evaluate each option. Begin by summarizing the available information to document the relevant alternatives, using a tabular form. Document your evaluation using mean-variance analysis. Summarize factors essential to your decision in writing and with graphical representations. 

Consult the Discussion Posting Guide for information about writing your discussion posts. Be sure to check your work and correct any spelling or grammatical errors before you post it. When you are ready to post, click on the "Create Thread" button for a new thread or "Reply" to respond to a previous post. Then, copy/paste the text from your document into the message field, and click "Submit."

EVALUATION

Discussion board participation is worth 20% of your overall course grade and is evaluated using the M6D1 Discussion Rubric. Review the M6D1 Discussion Rubric located in the “Start Here” section of the course for more information on grading criteria. Please review the rubric carefully so you have a full understanding of how you will be evaluated

Consult the Discussion Posting Guide for information about writing your discussion posts. Be sure to check your work and correct any spelling or grammatical errors before you post it. When you are ready to post, click on the "Create Thread" button for a new thread or "Reply" to respond to a previous post. Then, copy/paste the text from your document into the message field, and click "Submit.".