Practice Question 2.) Assume that the inverse demand function for the depletable resource is P=10-0.4q. Assume...

Practice Question 2.) Assume that the inverse demand function for the depletable resource is P=10-0.4q. Assume the same demand conditions for both periods. The first scenario is where there are 30 units of a depletable good that needs to be allocated between two periods. The marginal cost of extraction is $4.

a. Calculate the static efficient allocation for Period 1 and Period 2.

b. Calculate the society’s present value of net benefits for both periods. Assume the discount rate is zero.

c. Is there intertemporal scarcity in this case? Explain.

Assume that there is a drop to 20 units of this good be allocated between two periods. Let the discount rate be 0.05 and the marginal cost of extraction be $4.

d. Calculate the dynamic efficient allocation for Period 1 and Period 2.

e. Calculate the society’s present value of net benefits for both periods.

f. Is there intertemporal scarcity in this case? Explain. Determine the marginal user cost for both periods.

g. If a permanent fund is established, how much of the first period net benefits should be invested to have a sustainable outcome?

Expert Solution

The solution is given as below:

Rahul Sunny answered 2 years ago

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