Consider a two-period model in which there is a fixed supply of a depletable resource. The demand for this resource is constant over both periods and is given as:
P = 176 – 0.4Q and MC = 44
There is an initial resource endowment (supply) of 1000 units of the depletable resource.
a. Based on this information, what it the amount of the resource extracted in each period. Show your work as well as a graph showing the outcome in each period.
b. Now suppose the initial resource endowment (supply) is now given to be only 400 units of the good and you are told the discount rate (factor) is determined to be 8 percent. Given this information, how much of the resource will be extracted in time period 1 and time period 2 if you desire to satisfy the condition that the present value of the marginal benefit from the last unit in period 1 equals the present value of the marginal net benefit in period 2?
