Question

Question 2

The total quantity of natural resources to be extracted is 100 units, the rate of return is 5%pa the price now is $20 per unit, the price in 1 year is $30 per unit and the marginal extraction cost for both points in time is the same $10 per unit. How many units should be extracted now? Choose at least one correct answer

1. Approximately 66 units

2. Approximately 100 units

3. Approximately 0 units

4. Approximately 35 units

Question 3

To get the marginal user cost, for Question 2 above, it is simply price less the marginal extraction cost.

1. True

2. False

Question 4

Hotelling rule states that "the value of extracting a quantity of resources now and then earning interest on it such that the value grows to a future point in time" is equal to "the value of extracting a quantity of resource at the same future point in time".

1. True

2. False

Answer 1

The marginal extraction cost is the opportunity cost of resources employed in the extraction activity.

Formula=100/(1+r)

here if the purchase all the 100 units now we will have to pay

present value = 20*100= 2000

Future value = (1+0.05)*2000=2100

Therefore we should buy all 100 units now only as The rate is gonna be 30 and it will be costly for us to buy at that time

Marginal User Cost. When resources are scarce, greater current use diminishes future opportunities. Thus, the MARGINAL USER COST = Present Value of forgone opportunities at the margin. Present Value of MUC are equal over time

So the statement is True

To get the marginal user cost, we just simply need to, less the marginal extraction cost from the price

Hotelling's rule defines the net price path as a function of time while maximizing economic rent in the time of fully extracting a non-renewable natural resource. The maximum rent is also known as Hotelling rent or scarcity rent and is the maximum rent that could be obtained while emptying the stock resource

Thus the above statement is True

Hotelling rule states that "the value of extracting a quantity of resources now and then earning interest on it such that the value grows to a future point in time" is equal to "the value of extracting a quantity of resource at the same future point in time".