Suppose that we have a fixed supply of a depletable resource to allocate between two periods. For simplicity, lets assume that demand for the resource is constant across the two periods, and that no substitute for the resource exists. Let inverse demand and marginal cost of extraction be given by: P = 10 0.5Q MC = 3 a. What are the marginal net benefits in each period? b. If the available supply of the resource is 20 units, find the dynam- ically efficient allocation (assume a discount rate of r = 0.2). c. Why is it optimal to consume relatively more of the good in period 1 than in period 2? Would this effect be larger or smaller if the discount rate were higher? d. Calculate the marginal user cost (or scarcity rent ) associated with each time period. What is the equilibrium total marginal cost in each time period? Why is it larger than the marginal cost of extraction? e. Draw a pair of diagrams illustrating the efficient allocation in each time period. 1