Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Consider a simple model for non-renewable resources, where society only values extraction, so the utility function is U(qt)), where U'(qt) > 0 and U''(qt) <

Consider a simple model for non-renewable resources, where society only values extraction, so the utility function is U(qt)), where U'(qt) > 0 and U''(qt) < 0. Suppose that the marginal cost of extraction is 0, and the competitive mining industry faces a linear inverse demand curve,Pt=a-bqt . Also, suppose that the shadow price on remaining reserves in period T + 1 is zero so that Lambdat+1=0. This means we can replace our difference equation with the exhaustion condition, R0 qt = 0 . Let u denote the shadow price on the initial reserves, the rate of extraction in period t is denoted by qt). (a) Write out the Lagrangian and the first-order necessary conditions for this problem. (5 points) (b) What is dL/dR0, equal to, and what is its economic interpretation? (3 points) (c) From the first order conditions, derive the relationship between marginal utility for q0, and for the marginal utility for qt)

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Leading and Collaborating in the Competitive World

Authors: Thomas S Bateman, Scott A Snell, Robert Konopaske

13th edition

1259927644, 1259927645, 978-1260194241

More Books

Students also viewed these Economics questions