Question

Consider the framework with gold used as money. Suppose the consumption of gold offers people a...

Consider the framework with gold used as money. Suppose the consumption of gold offers people a Marginal Utility that diminishes as that person consumes more gold. Assume that gold can be mined in unlimited amounts at a constant marginal cost c measured in terms of the units of the nongold consumption good.

  1. Use the money market equilibrium where gold is used as money to find the value of gold when used as money or trading value of gold.
  2. Can the trading value of gold exceed c in equilibrium? Explain your answer.
  3. What will be impact of gold consumption and mining due to an increased use of gold as money? Explain your answer.
  4. If c increases with the amount of mining, what will be the impact on gold consumption and mining of an increased use of gold as money. In order to explain your answer, find the intrinsic value of gold and compare it with the trading value or monetary value of gold to show the impact of rise in c on use of gold as money.
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Answer #1

i. since market is a perfect competiton one so Marginal cost= value of gold =c

ii. no, since market is having a perfect competition so value>c then there would be an incentive to mine more.\

iii.increase in use of god money will increase the demand for money hence demand curve will shift and consumption will increase.

iv.as c increases, value of gold will increase leading to fall in quanity demand for gold hence decreases the consumption. in this case intrinstic value and market value would be same due to perfect competition.

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