2. An oil rich economy owns 100 barrels of oil which can be extracted at a unit cost of $2 a barrel. It faces a demand curve Q(t)=100-2P(t), t=1,2,3 years. The discount rate is 12%. Assume that the world will end at the end of the third year.

Assume a two-period small open economy model, where the national product is 50 in the current period, and 88 in the future period. The world real interest rate is 10% per period. The representative consumer has the following utility function: U(c,G,c’,G’) = ln(c+G) + ln(c’+G’). a) What are the optimal consumption plus government spending in the current and in the future period? What is the current account surplus? Show this in a diagram. b) Now, suppose that governments in the rest of the world impose a tax on lending to foreigners of 5%. Determine how this affects consumption plus government spending in the present and the future, and the current account surplus. Explain your results. c) Suppose that governments in the rest of the world still impose a tax on lending to foreigners of 5%. However, the national country found a huge reserve of oil and the current period income increased to 100. The Determine how this affects consumption plus government spending in the present and the…

Consider a standard Heckscher-Ohlin (HO) Model, where two countries Home and Foreign produce two goods, sugar and milk, using labour (L) and capital (K). Home is relatively labour abundant and Foreign is relatively capital abundant. Assume that sugar is relatively capital intensive and milk is relatively labour intensive. Answer the following questions: (i) Discuss the pattern of trade between the two countries. (li) Under what conditions factor price equalization may be obtained Discuss with help of a diagram showing the segment of equalizatie

Assume that a country is endowed with 24 units of oil reserve.   (a) the marginal willingness to pay for oil in each period is given by P = 13 – 0.56q(b) the marginal cost of extraction of oil is constant at $3 per unit(c) the discount rate is 1%(d) the marginal cost of renewable energy is $9, where c<d<a.  How long will it take, for a country to transition to a renewable energy source?

What are the final answers to each part.

Assume that a country is endowed with 2 units of oil reserve. There is no oil substitute available. How long the oil reserve will last if (a) the marginal willingness to pay for oil in each period is given by P = 8 - 0.61q, (b) the marginal cost of extraction of oil is constant at $4 per unit, and (c) discount rate is 2%?