Suppose the consumption of gold offers people a marginal utility that diminishes

Question

Suppose the consumption of gold offers people a marginal utility that diminishes as that person consumes more gold. Assume also that gold can be mined in unlimited amounts at the constant marginal costs, X (or chi), units of the nongold consuption good.

a) can the trading value of gold exceed X in equilibrium? Explain. What is the effect on gold consumption and mining of an increased use of gold as money?

b) Suppose instead that the marginal mining cost increases with the amount mined. What is now the effect on gold consumption and mining of an increased use of gold as money?

Explanation / Answer

a.) No, X is the limiting value, so even at the highest demand of Gold, its value cannot exceed X, it will differ if Gold cannot be mined in unlimited amounts at fixed costs in case of which as the demand will increase the prices will increase as far as possible.

There will be mixed effects :

1. COst would increase as the demand of gold thenwould increase and thus alter very much like the value of Dollar or Yen.

2.) Gold will become a liquid asset than and demand of gold will increase., ie; itsprice will tend to decrease itself. // though there will be other factors too but these are the top 2. On mining after a certain level profit margins will halt.

b.)In this case it will follow the conventional demand-supply model ie;

-price will increase as demand increases.

-price decrease when demand decreases.

In tis case though prices will rise more rapidly, though the demand will decrease as a result of increased prices.

On mining : it willl be very profitable.

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