Question

Consider a nonrenewable resource that can be consumed either today (period 1) or tomorrow (period 2) and has a finite supply of 12 units. Assume the inverse demand for the resource in both periods is:

P_1 = 90 - 5Q_1

P_2 = 90 - 5Q_2

Assume the marginal cost of extracting the resource is constant at $15 and the social discount rate is 10 percent (r = .10).

If the social discount rate is decreased to 5% (r = .05), how much less of the resource would be consumed in the first period, assuming a dynamically efficient allocation? Please report your answer out to at least two digits (e.g., 3.24).

Hint: Solve for the efficient allocation of the resource at r = .1 and then at r = .05. The difference in period one consumption is your answer.

Answer 1