Question
Consider a nonrenewable resource that can be consumed either today (period 1) or tomorrow (period 2) and has a finite supply of 10 units.Assume the
Consider a nonrenewable resource that can be consumed either today (period 1) or tomorrow (period 2) and has a finite supply of 10 units.Assume the inverse demand for the resource in both periods is:
P_1 = 70 - 5Q_1
P_2 = 70 - 5Q_2
Assume the marginal cost of extracting the resource is constant at $5 and the socialdiscount rate is 8 percent (r= .08).
If the social discount rate is increased to 12% (r= .12), how muchmoreof the resource would be consumed in the first period, assuming a dynamically efficient allocation?Please report your answer out to at least two digits (e.g., 3.24).
Hint: Solve for the efficient allocation of the resource at r = .08 and then at r = .12.The difference in period one consumption is your answer.
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