Using a two-period model, illustrate the maximization of net benefits over time.

Q: Using a two-period model, illustrate the maximization of net benefits over time.

a) periods 1 &2 = 10 - 0.4 * 2 = 9.2 b) benefits = 30*2 = 60 c) How does a change in rate of discount affect these efficient allocations? 10% discount

ID: 1257408 • Letter: U

Question

Using a two-period model, illustrate the maximization of net benefits over time. Show how this is done mathematically and graphically (Assume the demand curve be P=10-0.4Q, marginal extraction costs are constant at $2/unit, and a resource constraint of 30 units, use 10% discount rate). a. How much resources are allocated in periods 1 & 2? b. What are the net benefits in periods 1 & 2? What is the present value of total net benefit? c. How does a change in rate of discount affect these efficient allocations?

Explanation / Answer

periods 1 &2 = 10 - 0.4 * 2 = 9.2

benefits = 30*2 = 60

How does a change in rate of discount affect these efficient allocations?

10% discount

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Using a two-period model, illustrate the maximization of net benefits over time.

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