Suppose Two Companies Own Adjacent Oil Fields

Multiple Choice

Suppose two companies own adjacent oil fields. Under the two fields is a common pool of oil worth $60 million. For each well that is drilled, the company that drills the well incurs a cost of $4 million. Each company can drill up to two wells. What is the likely outcome of this game if each company pursues its own self-interest?

A) Each company drills one well and experiences a profit of $26 million.
B) Each company drills one well and experiences a profit of $22 million.
C) Each company drills two wells and experiences a profit of $22 million.
D) One company drills two wells and experiences a profit of $32 million; the other company drills one well and experiences a profit of $16 million.