FOUR-PART QUESTION

Quantity of Gold Bars (in thousands)	Extraction Cost (in millions of dollars)	User Cost (in millions of dollars)
0	$ 10	$ 5
1	15	5
2	20	5
3	25	5
4	30	5
5	35	5

4a. The table shows the quantity of gold bars in thousands, the extraction cost for each thousand bars (in millions of dollars), and the user cost of each thousand bars (in millions of dollars) facing the OZ Mining Company this year (all costs are marginal). If the current price of a bar of gold is $20,000, how many bars (in thousands) should OZ extract and sell this year in order to maximize profits?

Multiple Choice

2

1

3

4

Quantity of Gold Bars (in thousands)	Extraction Cost (in millions of dollars)	User Cost (in millions of dollars)
0	$ 10	$ 5
1	15	5
2	20	5
3	25	5
4	30	5
5	35	5

4b. The table shows the quantity of gold bars in thousands, the extraction cost for each thousand bars (in millions of dollars), and the user cost of each thousand bars (in millions of dollars) facing the OZ Mining Company this year (all costs are marginal). Suppose that a new government regulation is going to shut down OZ's mining operation one year from now. If the current price per bar of gold is $35,000, how many bars (in thousands) should OZ extract and sell this year?

Multiple Choice

3

5

4

As many as possible

Quantity of Gold Bars (in thousands)	Extraction Cost (in millions of dollars)	User Cost (in millions of dollars)
0	$ 10	$ 10
1	15	10
2	20	10
3	25	10
4	30	10
5	35	10

4c. The table shows the quantity of gold bars in thousands, the extraction cost for each thousand bars (in millions of dollars), and the user cost of each thousand bars (in millions of dollars) facing the OZ Mining Company this year (all costs are marginal). If the current price of a bar of gold is $35,000, how many bars (in thousands) should OZ extract and sell this year in order to maximize profits?

Multiple Choice

2

3

4

5

4d. A farmer discovers a natural gas reserve on his property. He can extract the natural gas for a profit of $70 per unit now, $72 per unit in one year, $74 per unit in two years, and $76 in three years. The current market rate of interest is 4 percent. When should the farmer extract the natural gas to obtain the most profit per unit in present value terms?

Multiple Choice

two years

three years

one year

today