Address the following: a) Suppose that the allocation of a natural resource during three years results in a stream of total surplus value of $100 per period t (i.e.: t = 0; 1; 2). Obtain the present value of this stream when the discount rate is r = 0.10 and also when it is r = 0.05.
Address the following:
a) Suppose that the allocation of a natural resource during three years results in a stream of total surplus value of $100 per period t (i.e.: t = 0; 1; 2). Obtain the present value of this stream when the discount rate is r = 0.10 and also when it is r = 0.05.
b) Alternatively, the resource could be fully extracted now (say, in the period t = 0), resulting in a total surplus $280 at t = 0 and 0 in every future period. Is this immediate extraction strategy preferred to the extraction strategy described in (a) when r = 0.10? What about when r = 0.05? What does this tell us about the intuitive meaning of discounting regarding intertemporal preferences
c) Explain what it means that a resource allocation is dynamically efficient
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