Consider a non-renewable natural resource with a per period demand curve of P=40-.5q and a marginal cost of extraction of 4. Use this information to answer the following questions about the two- period model. a. If we have a 25% discount rate and 150 total units of natural resources, what is the optimal amount of extraction in each period? b. What are the net benefits of extraction in each period? (Hint: Consider total net benefits, not just marginal net benefits. It will be helpful to draw a graph.) c. Now imagine we have a 0% discount rate and 100 total units of natural resources. What is the dynamically efficient amount of extraction in each period? d. If the discount rate increases to 20%, but we still have 100 total units of natural resources, what is the dynamically efficient amount of extraction in each period. e. Graph the extraction quantities here on 3 axes, with the per period quantities on the horizontal.
Consider a non-renewable natural resource with a per period demand curve of P=40-.5q and a
marginal cost of extraction of 4. Use this information to answer the following questions about the two-
period model.
a. If we have a 25% discount rate and 150 total units of natural resources, what is the optimal amount of
extraction in each period?
b. What are the net benefits of extraction in each period? (Hint: Consider total net benefits, not just
marginal net benefits. It will be helpful to draw a graph.)
c. Now imagine we have a 0% discount rate and 100 total units of natural resources. What is the
dynamically efficient amount of extraction in each period?
d. If the discount rate increases to 20%, but we still have 100 total units of natural resources, what is the
dynamically efficient amount of extraction in each period.
e. Graph the extraction quantities here on 3 axes, with the per period quantities on the horizontal.
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