EEP1/ECON3 PROBLEM SET 6 NEW 2016

DOWNLOAD HERE

EEP1/ECON3 PROBLEM SET 6 NEW 2016

1. Assuming that the inverse demand function for shale gas in period 1 is P1 = 90 – q1 and the

demand function in period 2 is half of the demand of Period 1 (i.e. future generations prefer to

consume renewable resources). The Marginal Cost in Period 1 and Period 2 are both constant and

equal to MC=$5. Furthermore, assume that the discount rate is 5%, and the total amount of the

shale gas is 50 tons.

(a) Find the Dynamic Efficient Allocation. Determine the current, future and total quantity of the

depletable resource. Discuss.

(b) Compute the optimal prices and Marginal User Cost (MUC) in both periods.

(c) Construct a graph representing the dynamic efficient allocations in both periods.

(d) Would the static and dynamic efficiency criteria yield the same answers for this problem? Why

or why not?

2. There are two persons stranded on a desert island. Their respective annual demand for coconuts

are as follows: