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Consider a two-period model where inverse linear demand for a natural resource is P = 100...

Consider a two-period model where inverse linear demand for a natural resource is P = 100 – Q, and supply is flat at P = MC = 1. The discount rate is 20%. Assume society is endowed with a large amount of the resource (that is, the resource endowment is not a constraint to its allocation).

a) What is the static efficient allocation for period 1?

b) What is the static efficient allocation for period 2?

c) What is the dynamic efficient allocation path (allocation for period 1 and 2)?

d) Compare your answers of parts a, b, and c, and offer brief discussion.

e) Is the dynamic allocation sustainable? Explain your answer.

f) Assume the interest rate decreases to 10%, do your answers to parts a), b), or c) change? Explain your answers.

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Expert Solution

Rahul Sunny answered 1 year ago
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