Assume That You Own an Exhaustible Resource That Is Sold

question 30

Essay

Assume that you own an exhaustible resource that is sold competitively. The price of the resource is:
P_{t + 1} - C = 1.08(P_t -
C),
where t = 0 at the beginning of 2005, P = price in dollars per ton, and C = marginal cost of extraction (fixed over time). It is also known that the demand for the resource is:
Q = 1,000,000 - 25,000 P,
where Q represents output in tons per year. If the beginning of 2005 price is $30 per ton and the marginal cost of extraction is $10 per ton, what will the price be at the end of 2009? What is the user cost of production in 2009? Is it different from the user cost for 2005? Explain. How much of the resource will be extracted in 2009? What is the market rate of interest on money? Explain.

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Definitions:

Liberty Rights

The right to be left alone to pursue our legitimate interests.

Legitimate Interests

Interests that do not violate others’ similar and equal interests.

Ethical Subjectivist

One who believes that morality is nothing more than personal opinion or feelings.

Tolerant

Showing willingness to allow the existence of opinions or behavior that one does not necessarily agree with.