Q2) QUESTION 2 HAS TWO PARTS a) For a typical nonrenewable resource, would you expect the...

Q2) QUESTION 2 HAS TWO PARTS a) For a typical nonrenewable resource, would you expect the rate of extraction to increase, be constant, or decrease over time? Why? Explain with graph. b) Following the reasoning of Harold Hotelling, we might expect the real price of nonrenewable resources to increase continually over time, as resource stocks are depleted. But, empirical evidence (as documented by Margaret Slade) for a number of nonrenewable (mineral) resources indicates that their prices over the past century have not been increasing monotonically; instead, the price paths of a number of nonrenewable resources have been "U-shaped." Explain what's going on; i.e. resolve this apparent anomaly between theory and observation.

Expert Solution

Above graph shows the production rate vs time for non renewable resourse.

So, as depicted from the graph the extraction rate increases first and then degrades.

Above graph shows the Hotelling's price path. Here it can be seen that the price of the non renewable resourse should increase with time.

This is the actual price time graph for non renewables.

This graph does not match hotelling's price path majorly because of assumptions involved in hotelling's price path

"There are no alternatives to the resource." This is an assumption behind hotelling's price path. But this assumption is not true in reality, due to which both the graphs do not match.

Rahul Sunny answered 2 years ago

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