Bundle: Managerial Economics: Applications, Strategies And Tactics, 14th + Mindtap Economics, 1 Term (6 Months) Printed Access Card
14th Edition
ISBN: 9781337198196
Author: James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris
Publisher: Cengage Learning
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Chapter 7A, Problem 2E
To determine
Effect on the optimal rate of extraction for a T oilfield due to low historic interest rates.
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Suppose the Marginal Benefit and Marginal Cost for crude oil at any given period is:
MB = 159 - 2.1Q and MC=36 + 0.9Q
Where price is measured in dollars and quantity is measured in barrels. The total oil reserve is 50 tons.
What is the Optimal barrels of oil that should be extracted in the current period (suppose we don’t need to be concerned with any future periods)?
The world's total petroleum reserve is estimated at 1.5 x
1022 J. At the present rate of consumption, 6.027 x
1017 J/day, how long would it take to exhaust the
supply (in years)?
What are the benefits and risks associated with just-in-time delivery of inputs to factories? Why do computer chip factories run
continuously rather than maintaining some spare capacity? What is the underling economic concept that explains why 80 percent of
the world's most advanced computer chips are produced by a single firm, Taiwan Semiconductor, rather than by many small firms?
Just-in-time delivery of inputs to factories has benefits and risks. Identify which of the following are true. You may select more than one
answer.
Instructions: In order to receive full credit, you must make a selection for each option. For correct answers), click the box once to
place a check mark. For incorrect answerts), click the option twice to empty the box.
5
33
It eliminates the costs associated with maintaining inventories of inputs
If a single type of input is not delivered on time, a factory production line will have to be shut down.
Inventories are easier to track and manage
33
Firms can more…
Chapter 7A Solutions
Bundle: Managerial Economics: Applications, Strategies And Tactics, 14th + Mindtap Economics, 1 Term (6 Months) Printed Access Card
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- Given that the marginal cost of a ‘backstop’ (e.g. solar energy) is MCb per unit of an exhaustible resource, prove that the cost of the ‘backstop’ sets an upper limit on oil price and also determines the initial price of oil. (Hint:Utilize the expression pt = MC + (p0 − MC)(1 + r)t and consider T as theswitch date.)arrow_forwardConsider a non-renewable natural resource with a per period demand curve of P=40-.5q and amarginal cost of extraction of 4. Use this information to answer the following questions about the two-period model.a. If we have a 25% discount rate and 150 total units of natural resources, what is the optimal amount ofextraction in each period?b. What are the net benefits of extraction in each period? (Hint: Consider total net benefits, not justmarginal net benefits. It will be helpful to draw a graph.)c. Now imagine we have a 0% discount rate and 100 total units of natural resources. What is thedynamically efficient amount of extraction in each period?d. If the discount rate increases to 20%, but we still have 100 total units of natural resources, what is thedynamically efficient amount of extraction in each period.e. Graph the extraction quantities here on 3 axes, with the per period quantities on the horizontal.arrow_forwardRecall the model of nonrenewable resource extraction presented in Figure. Suppose that a technological breakthrough means that extraction costs will fall in the future (but not in the present). What will this do to future profits and, therefore, to current user cost? Will current extraction increase or decrease? Compare this to a situation where future extraction costs remain unchanged but current extraction costs fall. In this situation, does current extraction increase or decrease? Does the firm’s behavior make sense in both situations? That is, does its response to the changes in production costs in each case maximize the firm’s stream of profits over time?arrow_forward
- FOREST owners are seeing the best returns for years as a result of snaring a greater share of the huge Chinese market, but some Kiwi sawmills are running short of logs as a result. In 2009, log sales to China were worth about $530 million, more than double the $236m the previous year, and volumes were also more than double levels in 2008. Log prices remained at historically high levels of about US$145 a cubic metre for A grade logs delivered to China, according to a report from PF Olsen. ...the Timber Industry Federation warns that timber prices are likely to rise at least 10 per cent, after recent log price rises of up to 15 per cent. Prices for logs kept going up. China has become a key log market for New Zealand and log exports are "way up and forest owners are quite happy", one big forest company executive said. Another forest investor Roger Dickie, of Roger Dickie NZ, said the "log market has definitely improved, quite dramatically in the last few months" as a result of the…arrow_forwardFOREST owners are seeing the best returns for years as a result of snaring a greater share of the huge Chinese market, but some Kiwi sawmills are running short of logs as a result. In 2009, log sales to China were worth about $530 million, more than double the $236m the previous year, and volumes were also more than double levels in 2008. Log prices remained at historically high levels of about US$145 a cubic metre for A grade logs delivered to China, according to a report from PF Olsen. ...the Timber Industry Federation warns that timber prices are likely to rise at least 10 per cent, after recent log price rises of up to 15 per cent. Prices for logs kept going up. China has become a key log market for New Zealand and log exports are "way up and forest owners are quite happy", one big forest company executive said. Another forest investor Roger Dickie, of Roger Dickie NZ, said the "log market has definitely improved, quite dramatically in the last few months" as a result of the…arrow_forwardLearning how to use software takes time. So once customers have learned to use a particular software package, it is easier to sell them software upgrades than to convince them to switch to new software. What implications does this have for expected rates of return on R&D spending for software firms developing upgrades versus firms developing imitative products?arrow_forward
- In the Faustmann model, what factors determine the marginal benefits and marginal costs of allowing a stand of trees to continue to grow for another year, and therefore the dynamically efficient harvest interval?arrow_forwardThink 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 50%. 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. The dynamically efficient quantities and prices are Q₁= period 1 and Q2= and P2= and P1= for period 2. Hint: Round numbers to one decimal place. forarrow_forwardThink 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.arrow_forward
- Consider the following two-period model of dynamically efficient extraction of a non-renewable natural resource. The constant social marginal cost of extraction is 40 in each period and the total stock of the resource is Q = 300 units. Moreover, the social marginal beneÖt is MB(Qt) = 200 Qt, where Qt is the quantity of resource extracted in period t, for t = 0; 1. The discount factor is 0:8. (c) Suppose that there is a market to trade the resource. What is the equilibrium price corresponding to each period? Justify the answer.arrow_forwardSuppose that the production function is given by Y=AK0.4N0.6. What is the percentage change in output if TFP declines by 12%? Write the answer in percent terms with up to two decimals (e.g., 10.22 for 10.22%, or 2.33 for 2.33%).arrow_forwardSuppose that there is a nonrenewable resource that can be consumed today (period 1) or tomorrow (period 2) and that it has a fixed supply of 10 units. Assume that the inverse demand for the resource in each period is given by: P; = 100- 5Q; P2 = 100- 50, %3D %3D Moreover, assume that the marginal extraction cost is constant in both periods at $20 and that the social discount rate is 10% (i.e., r=0.10). If the social discount rate is decreased to 5% (i.e., r=0.05), then how much less of the resource would be consumed in the first period? (Hint: solve for the efficient allocation of the resource in first period Q, at r=0.10 and again at r=0.05. The difference between these two values is your answer.) Piease round your intermediary calculations (e.g., prices and quantities) and your final answer to two decimal places if necessary. Answer:arrow_forward
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