Now, assume that society like to allocate the reserve efficiently across both periods.B: If the discount rate is Zero (0%), what should be the optimal allocation for the 2 periods?C: Now assume the discount rate is 5.5%, what should be the optimal allocation for the 2 periods? Suppose the Marginal Benefit and Marginal Cost for crude oil at any given period isMB = 380 – 3Q and MC = 28 + 1QWhere price is measured in dollars and quantity is measured in barrels. Assume the following:• The total oil reserve is 120 tons• There are 2 periods, 11 years apart• MB and MC are the same in both periodsResource Allocation, Part A:If the first period is ONLY interested in maximizing its own welfare and no restriction is imposed,how much will each period end up consuming? (i.e. what is Q₁ and Q2)?barrels and Q2Q₁=barrels

Given information MB=380-3Q MC=28+1Q Total stock for the oil reserves=120tons There are 2 time periods: current and 11 years apart MB and MC are the same in both time periods. Let's take q1--- current period and q2-- future time period after 11 years MB1=380-3q1 MC1=28+1q1 MB2=380-3q2 MC2=28+1q2 For dynamic efficiency Present value of the current benefit=present value of the benefit in future period Optimization condition MB=MC or MB-MC=0 Part b)PV(MB1-MC1)=PV(MB2-MC2)When r=0%380-3q1-28-1q1=380-3q2-28-1q21+0352-4q1=352-4q2q1+q2=120q2=120-q1By substituting q2 value352-4q1=352-4(120-q1)352-4q1=352-480+4q1480=8q1q1=60q2=120-60=60Extraction in period 1=60 tonsExtraction in period 2=60 tonsPart c)When r=5.5%380-3q1-28-1q1=380-3q2-28-1q2(1+0.055)11352-4q1=352-4q21.8020By substituting q2 value1.8020*(352-4q1)=352-4(120-q1)634.304-7.208q1=352-480+4q111.208q1=762.304q1=68.014=68tons approxq2=120-68=52tons.Extraction in period 1=68 tonsExtraction in period 2=52 tons

Answered: Suppose the Marginal Benefit and…

ENGR.ECONOMIC ANALYSIS

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Chapter1: Making Economics Decisions

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Now, assume that society like to allocate the reserve efficiently across both periods.

B: If the discount rate is Zero (0%), what should be the optimal allocation for the 2 periods?

C: Now assume the discount rate is 5.5%, what should be the optimal allocation for the 2 periods?

Suppose the Marginal Benefit and Marginal Cost for crude oil at any given period is
MB = 380 – 3Q and MC = 28 + 1Q
Where price is measured in dollars and quantity is measured in barrels. Assume the following:
• The total oil reserve is 120 tons
• There are 2 periods, 11 years apart
• MB and MC are the same in both periods
Resource Allocation, Part A:
If the first period is ONLY interested in maximizing its own welfare and no restriction is imposed,
how much will each period end up consuming? (i.e. what is Q₁ and Q2)?
barrels and Q2
Q₁
=
barrels

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