Question

When marginal benefits and marginal costs of extracting a non-renewable resource are the same in every time period, what is the effect of discounting on efficient consumption and prices, now and in the future?

a. Discounting makes efficient consumption lower in the future, and prices higher in the future

b. Discounting makes efficient consumption lower now, and prices higher in the future.

c. Discounting makes efficient consumption higher now, and prices higher now.

d. Discounting makes efficient consumption lower in the future, and prices lower in the future.

e. Discounting affects consumption and prices, but we do not have enough information to say whether prices and consumption will be higher or lower in the future than they are now.

Answer 1

Answer:

Option A is correct :

Discounting makes efficient consumption lower in the future (It will, because with discounting, people will consume higher now and there will be a scarcity in future, which will cause the consumption lower in future), and prices higher in the future (Correct , because when the supply will be lower due to unavailability of the resource, as its non renewable resource the prices will be high).

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Option B is incorrect as with discounting in prices will raise the consumption now, so the resource will be in scarcity in future and price will be high. As a result, High consumption Now and higher price in future.

Discounting makes efficient consumption lower (incorrect) now, and prices higher in the future.

Option C is incorrect -Discounting makes efficient consumption higher now (correct) , and prices higher now (Price will be lower as there will be discounting in price).

Option D is incorrect as Discounting makes efficient consumption lower in the future(correct, because the resource will be unavailable to use in high quantity, and prices lower (incorrect, the prices will be higher due to scarcity of resource) in the future.

Option E is also in correct.