Hotelling’s rule presents a very specific prediction for prices of a nonrenewable resource. What is this...

Hotelling’s rule presents a very specific prediction for prices of a nonrenewable resource. What is this prediction? Give two reasons why we may not observe this pattern in the data and explain why these reasons would undermine the prediction.

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ANSWER-

Rahul Sunny answered 1 year ago

The intuition behind Hotelling’s rule that prices of nonrenewable or depletable resources should rise at a...

The intuition behind Hotelling’s rule that prices of nonrenewable or depletable resources should rise at a rate equal to the market interest rate, comes from the fact that ‘when a resource is abundant, then consumption today does not involve an opportunity cost of foregone marginal profit in future, since plenty available for both today and the future. So when resources are traded in a competitive market are abundant, P=MC and marginal profit is 0. As resource becomes increasingly scarce, however,...

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