Think the two-period model for a depletable resource such as coal. Period 1 is current time and period 2 is future, a year later. Annual discount rate is 5%. The (inverse) demand function for period 1 is P=27-Q and its marginal (extraction) cost is constant 3. The (inverse) demand function for period 2 is P=15-0.5Q and its marginal (extraction) cost is constant 3. Suppose the supply of coal is limited to 30 units. Marginal net benefit for period 1 is MNB1= Q1. Marginal net benefit for period 2 is MNB2= Q2. Hint: Remember you are not discounting marginal net benefit in period 2 yet.

Think the two-period model for a depletable resource such as coal. Period 1 is current time and period 2 is future, a year later. Annual discount rate is 5%. The (inverse) demand function for period 1 is P=27-Q and its marginal (extraction) cost is constant 3. The (inverse) demand function for period 2 is P=15-0.5Q and its marginal (extraction) cost is constant 3. Suppose the supply of coal is limited to 30 units. Marginal net benefit for period 1 is MNB1= Q1. Marginal net benefit for period 2 is MNB2= Q2. Hint: Remember you are not discounting marginal net benefit in period 2 yet.

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter17: Capital And Time

Section: Chapter Questions

Problem 17.10P: Wonopoly and natural resource prices Suppose that a firm is the sole owner of a stock of a natural...

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Suppose there is a nonrenewable resource with inverse demand function p= 30-0.8q and with marginal extraction costs (MEC)= 8. The resource stock, S is finite and = 35 units. Suppose the time horizon is 2 periods and the discount rate is r= 8%. What quantity should be extracted in each period? What is the optimal price of the resource in the 2 periods?
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Suppose the market demand curve for a non-renewable resource is given by: Q=2000-40P. Consider a finite-period model. Which of the following are true? Suppose the marginal cost of extraction is constantly at 40. Suppose the risk-free interest rate is 10% Select all correct answers. a. When there is plenty of this resource, the marginal user cost can be zero in all periods on the optimal extraction path. b. If marginal user cost is 2 in a given period on the optimal path, the marginal user cost should be 2.2 in the previous period c. The dynamically efficient extraction quantity is 400 per period until the resource is exhausted. d. When 200 units are exhausted in a given period, the marginal user cost is 5.
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Illustrate how NPW decision rules work?
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