( choose all the correct answers) Hotelling’s rule. Using the (graphical) two-pe
ID: 1117009 • Letter: #
Question
( choose all the correct answers) Hotelling’s rule. Using the (graphical) two-period model for a nonrenewable resource, analyze the effects of the following on equilibrium prices and quantities in the market for that resource:1. an increase in the interest rate: a. Q1 increases, Q2 Decreases b. P1 and P2 fall c. Q1 decreases, Q2 increases d. P1 increases, P2 decreases
2. an increase in second-period population: 1. an increase in the interest rate: a. Q1 increases, Q2 Decreases b. P1 and P2 fall c. Q1 decreases, Q2 increases d. P1 increases, P2 decreases
a. Q1 increases, Q2 Decreases b. P1 and P2 fall c. Q1 decreases, Q2 increases d. P1 increases, P2 decreases
2. an increase in second-period population: a. Q1 decreases, P1 increases b. Q2 increases, P2 increases
c. Q1 increases, P1 decreases
d. Q2 decreases, P2 increases
a. Q1 decreases, P1 increases b. Q2 increases, P2 increases
c. Q1 increases, P1 decreases
d. Q2 decreases, P2 increases
Market Equilibrium for a Nonrenewable Resource (Hotellings Rule) P MEC P MEC
Explanation / Answer
1.
As the interest rate increases the present value of the second period marginal net benefit, that is P-MEC/(1+r) will fall in the second period this pivots the curve down to AB' from AB as shown in the figure below. This increases the current consumption as the cost of extraction become expensive in future terms. Thus the correct option is
2.
The rise in future population increases demand for resources in the next period. This shifts the marginal net benefit curve upward as showth in the figure. Given the marginal net benefit in current period the shift increases current price and decreases current consumption. Therefore, the correct option is
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