The demand function for a depletable resource is p = 10 – Q while the extraction costs are C = 2Q. There is a fixed supply of 10 units that can be allocated between 2 periods. (a) Assume that the discount rate is zero. What is the dynamically efficient allocation in period 1 and 2? (b) What would be the competitive market allocation? (c) Explain in plain-English terms why the two allocations, in (a) and (b), are different.

The demand function for a depletable resource is p = 10 – Q while the extraction costs are C = 2Q. There is a fixed supply of 10 units that can be allocated between 2 periods. (a) Assume that the discount rate is zero. What is the dynamically efficient allocation in period 1 and 2? (b) What would be the competitive market allocation? (c) Explain in plain-English terms why the two allocations, in (a) and (b), are different.

ENGR.ECONOMIC ANALYSIS

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ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question

The demand function for a depletable resource is p = 10 – Q while the
extraction costs are C = 2Q. There is a fixed supply of 10 units that can be
allocated between 2 periods.
(a) Assume that the discount rate is zero. What is the dynamically efficient
allocation in period 1 and 2?
(b) What would be the competitive market allocation?
(c) Explain in plain-English terms why the two allocations, in (a) and (b),
are different.

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