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Suppose oil is only to be extracted over two periods (period 0 and period 1 ). The inverse demand for oil is estimated to be
Suppose oil is only to be extracted over two periods (period 0 and period 1 ). The inverse demand for oil is estimated to be p=300q, where p is the price of oil and q is the quantity demanded. The marginal cost of extraction is given by MC=q. These relations do not change from period to period. Assume a discount rate of r=0.05. Suppose the initial stock of oil in period 0 is S0=160. Consider the following two case. (i) In period 0, no new discovery of oil is anticipated in period 1. (ii) In period 0 , it is anticipated that there will be new discovery in period 1 which will add to oil reserves by S=165 in period 1 . Please compare the optimal allocation and price of oil in these two cases. (You do not need to solve for exact numbers.) Suppose oil is only to be extracted over two periods (period 0 and period 1 ). The inverse demand for oil is estimated to be p=300q, where p is the price of oil and q is the quantity demanded. The marginal cost of extraction is given by MC=q. These relations do not change from period to period. Assume a discount rate of r=0.05. Suppose the initial stock of oil in period 0 is S0=160. Consider the following two case. (i) In period 0, no new discovery of oil is anticipated in period 1. (ii) In period 0 , it is anticipated that there will be new discovery in period 1 which will add to oil reserves by S=165 in period 1 . Please compare the optimal allocation and price of oil in these two cases. (You do not need to solve for exact numbers.)
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