Final answer:
The question addresses the concept of value added and opportunity costs within the oil production supply chain, using production possibility frontier graphs to illustrate the trade-offs between producing oil and corn in different countries, specifically comparing the U.S. and Saudi Arabia.
Step-by-step explanation:
The question presented pertains to the concept of value added in economics, which is related to how different entities in the production and distribution chain of crude oil contribute to its final market value. To address part 'a' of the student's question, one would calculate the value added by the farmer by subtracting the initial value of the crude oil when it was in the ground from the amount the farmer receives for it ($[b] = $[a] - initial value). Similarly, part 'b' requires understanding that the value added by the crude oil producer is found by subtracting the costs associated with acquiring and selling the oil from the selling price ($[d] = $[c] - cost to producer, where $[c]= $25 × 10,000). Lastly, for part 'c', the value added by the pipeline company is the payment received minus its costs ($[f] = $[e] - costs to pipeline company, where $[e]= $1 × 10,000).
The use of a production possibility frontier serves as a tool to illustrate the opportunity cost of producing oil in terms of corn. For example, in the United States, every barrel of oil produced means forgoing the production of two bushels of corn, which is representative of the slope (1/2) of its production possibility frontier. Similarly, in Saudi Arabia, the opportunity cost of producing one barrel of oil is only 1/4 bushel of corn, indicating a much lower opportunity cost when compared to the U.S. This demonstrates Saudi Arabia's comparative advantage in producing oil rather than corn.