The current price of zinc, which is a depletable natural resource sold in a comp

Question

The current price of zinc, which is a depletable natural resource sold in a competitive market, is $1.03 per pound. The marginal cost to extract and sell zinc is $0.51 per pound. The marginal cost is expected to remain constant at this level for at least the next couple of years. The current interest rate is 4.7 percent. The user cost of production for zinc is $ ___per pound. (Enter your response rounded to two decimal places.) Given this information, the price of zinc next year should be about $____per pound.

Explanation / Answer

The market interest rate is 4.7 percent. If we assume that market will remain in competition, the equilibrium price expected to be prevailing next year should be at least equal to the interest bearing dollar

The current price of zinc is $1.03 per pound. Hence, it should be at least $1.03*1.047 or $1.078 per pound.

The marginal cost to extract and sell zinc is $0.51 per pound. With depletable resource, we must take into account the economic depreciation. Hence, the user cost of production for zinc is $0.51*1.047 or $0.53 per pound.

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