A Large (Subterranean)pool of Oil Lies in a Remote Region

question 7

Multiple Choice

A large (subterranean) pool of oil lies in a remote region of Ohio.Oil companies have explored this region and know how much oil there is.They have purchased the rights to drill and extract oil when they wish to do so.Because of the extremely forbidding geography and the savagery of the natives, the companies have decided to postpone extraction until the price of oil is higher.The theory of intertemporal arbitrage predicts that

• A)the companies are behaving irrationally.
• B)the price of rights to this oil must rise at the interest rate.
• C)the oil companies will not drill unless production costs fall.
• D)the price of rights to this oil will stay constant until it pays to extract.
• E)None of the above.

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