Question

Suppose again that you are the owner of a mineral deposit and you'd like to extract minerals to maximize the net present value of your deposit. You are trying to determine how long it should take to deplete the minerals in your deposit. What should be true about extraction in the last period?

A. Marginal rents should be smaller than the marginal rents in the previous period.

B. Marginal rents should be as large as possible.

C. Marginal rents should be zero.

D. Marginal rents should be as small as possible.

Answer 1

This is the theory of minerals where there is extraction cost. Such extraction cost indicates as rent.

Continuous extraction makes the deposit of mineral nil at one point of time in future. Therefore, before the stock or deposit vanishes, the extractor wants higher returns in terms of maximizing NPV.

Compare to two periods, if a period has lower marginal cost of rent or extraction than its previous period, then most of the extraction should be done in that lower-cost period. This is required for having higher profit margin and better NPV.

Answer: A