Question

Depletion of oil or other nonrenewable resources:

(a) entails exhaustion of the resource through extraction.

(b) stops when a business has deducted all capital costs.

(c) generates capital depreciation for tax purposes.

(d) is the sole cause of global warming.

(e) allows intangible drilling expenses to be deducted immediately.

Suppose the demand for oil in Alaska is given by 8 ? 0.4q while the supply is 2. Alaska only consumes its oil and the stock of oil is equal to 20 barrels for two years. If the interest rate is 10%, the government of Alaska will extract:

(a) X1 =5 and X2 =15.

(b) X1 =15 and X2 =5.

(c) X1 = 12.039 and X2 = 7.961.

(d) X1 = 11.278 and X2 = 8.722.

(e) None of the above.

Answer 1

1) Depletion of oil or other nonrenewable resources:

(a) entails exhaustion of the resource through extraction.

2) option a is correct

As total revenue, in this case (a) would-be higher as compared to any other option.

let us see how does it work:

At equilibrium D=S

and q=2

hence,P= 8-0.4(2)

P=8-0.8

= 7.2

Equating the above value in option (a) we get,

=7.2*5 +7.2*15 (1+0.1)

=154.8

solving for other options we get the following values

b) 147.6

c) 149.7

d) 150.2

As the total revenue in the first case is highest hence that option would be selected by Alaska government.