(20 points) The EuropoTron europium (Eu) mine is currently mothballed (i.e., shut down). The EuropoTron mine cannot...
Question:
(20 points) The EuropoTron europium (Eu) mine is currently mothballed (i.e., shut down). The EuropoTron mine cannot re-start production until one year from now. EuropoTron knows with certainty that the market price of europium per ton will be $930 next year. EuropoTron's marginal cost of production is MC(q) = 10 + q, where cost is measured in dollars per ton of europium and q is measured in tons of europium. EuropoTron's reserve is X = 900 tons. Assume that a competitor, MegaEuropo, is offering EuropoTron $400,000 for the nowdormant mine. If EuropoTron applies an annual discount rate of r = 0.05, should the company accept MegaEuropo's offer and sell the mine now? Or should it start up the mine, which will allow it to extract europium next year and earn the associated rents? State which option you think EuropoTron should choose. Justify your conclusion using complete sentences, numerical evidence and, optionally, one or more economic graphs.