1. Consider the following two-period extraction problem (assume a zero discount rate): Supply (marginal cost of extraction): MC1 = 4 MC2=2 Demand (marginal benefit of consumption): MB1 = 10 - Q1 MB2= 12 - Q2 Total supply of the resource: 10 a) What quantities and prices solve the dynamic efficiency problem, considering both time periods? b) Suppose government imposes a tax of $8 for each unit of the resource, starting in time period 2. Solve for the new prices and quantities in each time period. c) Find the level of the tax such that increases in the tax do not change Q1, but decreases in the tax do change Qi. d) How do your answers to parts (a) and (b) change if the resource is not scarce? For example suppose total supply of the resource is 1000.

1. Consider the following two-period extraction problem (assume a zero discount rate): Supply (marginal cost of extraction): MC1 = 4 MC2=2 Demand (marginal benefit of consumption): MB1 = 10 - Q1 MB2= 12 - Q2 Total supply of the resource: 10 a) What quantities and prices solve the dynamic efficiency problem, considering both time periods? b) Suppose government imposes a tax of $8 for each unit of the resource, starting in time period 2. Solve for the new prices and quantities in each time period. c) Find the level of the tax such that increases in the tax do not change Q1, but decreases in the tax do change Qi. d) How do your answers to parts (a) and (b) change if the resource is not scarce? For example suppose total supply of the resource is 1000.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question

Please answer part (d ) only..

1. Consider the following two-period extraction problem (assume a zero discount rate):
Supply (marginal cost of extraction): MC1 = 4
Demand (marginal benefit of consumption): MB1 = 10 - Q1 MB2 = 12 - Q2
Total supply of the resource: 10
MC2 = 2
a) What quantities and prices solve the dynamic efficiency problem, considering both time periods?
b) Suppose government imposes a tax of $8 for each unit of the resource, starting in time period 2.
Solve for the new prices and quantities in each time period.
c) Find the level of the tax such that increases in the tax do not change Qı, but decreases in the tax
do change Qi.
d) How do your answers to parts (a) and (b) change if the resource is not scarce? For example
suppose total supply of the resource is 1000.

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