Question

Use Ch. 6 to answer the following question. Suppose a depletable resource has a constant marginal extraction cost of $6 and the maximum amount anyone is willing to pay for the resource is $12. Suppose also that a renewable resource with a constant marginal extraction cost of $14 is a perfect substitute for the depletable resource. Will the depletable resource be exhausted? If so, at what point will the resource be exhausted? Explain.

Answer 1

A switch is when we switch from using depletbale resource to renewable resource. The switch occurs when the Marginal Cost of the depletable resourcec is equal to the marginal cost of the renewable resource.

But since in our case both the depletable and the renewable resource have constant marginal cost and they are different, the switch cant happen. The MC of the depletable resource is $6, while the MC of the renewable resource is $14. As the maximum people are willing to pay is $12, we will keep using the depletable resource and the switch wont happen. But since the resource is depletable, it will get exhausted one day.

The resource will be exhaused when there is nothing left and it has been fully depleted. In other words, when its MC suddenly becomes infinite.