Question

In: Economics

1. Consider a two period model in which a scare resource (say, oil) is allocated competitively....

1. Consider a two period model in which a scare resource (say, oil) is allocated competitively. The demand curve in both periods is given by ?? = 100 − ?? where ? = 1,2 represents the two periods. Let the unit extraction cost be $12 per barrel. Take the discount rate to be 5%.

(a) What is the threshold stock of barrels beyond which oil is no longer scare?

(b) Now suppose you are given 100 barrels of oil to allocate over the two periods. Compute quantities, prices, consumer and producer surplus and aggregate discounted welfare.

(c) How much would a monopoly supplier of oil extract in each of the two periods and at what price? Discuss by comparing to part (a).

Solutions

Expert Solution

(c) A monopolist will make the resource scarcier by supplying less than 100 in both the periods. And price will be higher in this case. Monopolist will enjoy the scarcity rent also.

Rahul Sunny answered 1 year ago
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