Question

According to the "flow condition" (or Hotelling's rule), what should be true if you are extracting a nonrenewable resource (with limited supply) optimally?

A. All answers are correct.

B. Marginal rents will be positive in all periods.

C. The present value of marginal rents should be equal in all periods.

D. Marginal rents should grow at a rate that is equal to the discount rate.

Answer 1

Answer A

Marginal rents need to be possitive as the one of the basic requirements in the hotelling's theory is that non-renewable resources are produced only when they yield more than the already available financial instruments. Hence they need to be positive in the first place. (Option B is correct)

The net benefits as per the dynamic efficiency model states that these benefits are maximized only when the marginal rent grows at the same rate as the discount rate (or interest rate in some countries). Hence option D is correct.

If you had understood the above paragraph, then you might have well known the reason why the present value of marginal rents is equal in all the periods. Anyways, why tho? Since the net price increases with the increase in rate, the net marginal benefits ( or in simple marginal rents) remain the same. Hence option C is correct as well.

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