Microeconomics
21st Edition
ISBN: 9781259915727
Author: Campbell R. McConnell, Stanley L. Brue, Sean Masaki Flynn Dr.
Publisher: McGraw-Hill Education
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Question
Chapter 19, Problem 6DQ
Sub part (a):
To determine
The impact of technological improvements in present and future costs.
Sub part (b):
To determine
The impact of technological improvements in present and future costs.
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Suppose the Marginal Benefit and Marginal Cost for crude oil at any given period is:
MB = 159 - 2.1Q and MC=36 + 0.9Q
Where price is measured in dollars and quantity is measured in barrels. The total oil reserve is 50 tons.
What is the Optimal barrels of oil that should be extracted in the current period (suppose we don’t need to be concerned with any future periods)?
. Assume the coal resource is in fixed supply and its stock is 15 units of coal. Assume 2 periods of extraction: present and future and a discount rate of r = 10%. The demand function is given by MB = 10 - 0.5q and the supply function is given by a fixed MC cost of extraction MC = $5/unit of coal.
a) What is the optimal extraction rate in a static setup of the problem? Show numerically. Why cannot it be applied to this resource?
b) What is the optimal extraction rate each period in a dynamic setup of the problem? Show numerically.
c) What are the prices and MUC-marginal user costs each period? Show numerically.
d) What are the total net benefits obtained if the extraction rate equals the dynamic efficient rate? Show numerically.
Consider a two-period competitive extraction model (where t = 0, 1) where demand is pt = 100 - 4qt, where qt is million tons mined per period, total extraction costs are 0 (the marginal extraction cost is zero), and the discount rate is 10 percent. If the total stock available to mine over these two periods equals 60 million tons, then…
A. there is scarcity and the marginal user cost is positive.
B. there is no scarcity and the marginal user cost is zero.
C. there is scarcity but the marginal user cost is zero.
D. there is no scarcity because the marginal extraction cost is zero.
Consider the previous question. Based on your answer to that question, we would expect (note: you don't need to solve for any quantity levels to answer this question):
A. q1 to be larger than q0.
B. q0 to be larger than q1. (wrong)
C. q0 to be the same as q1.
D. q0 to be positive and q1 to be negative.
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