Transcript Lecture 2 - Illinois State University

 Homework
#5 Due Monday
 Homework
#6 Due Oct. 22
 Extra
Credit Writing Assignment Oct.
17th
 Writing Assignment Due Oct. 24th
 Suppose
a market demand schedule for a
resource is P = 200 - 4Q and the market
supply schedule is P = 80 + 2Q.
• What is the equation for the marginal net benefit
curve?
• Disregarding future time periods, how much of
the resource would be produced?
• What is the marginal net benefit at this level of
production?
 What
is Hotelling’s rule?
 In
your own words, explain why they
claim “the fate of the world depends on
the discount rate”.
• What types of materials were collected at the
Household Hazardous Waste Collection
Drive?
• Why can these types of materials NOT go in
landfills?
• What was the cost for this one-day event, and
how much material was collected?
• Suppose the EAC did not collect Hazardous
Waste, how much would a private company
have to charge per ton to collect the waste?
A higher discount rate will favor the present. The amount
allocated to the second period falls as the discount rate rises.
 Assumptions
• Fixed supply of oil
• Consider two time periods only
• Total supply is 20 tons
• Demand (marginal WTP) is constant:
P  8  0.4q
MC  $2



Assume the demand conditions are the same, but let
the discounted rate be 0.05 and the marginal cost of
extraction be $2. Total supply available = 20. How
much would be produced in each period in an efficient
allocation?
Assume the discount rate is 0.1. What happens to the
efficient allocation?
Assume the discount rate is 0.2. What happens to the
efficient allocation?
 Marginal
user cost rises over time at the
rate of discount causing efficient prices
to rise over time and thus reflecting
scarcity.


The opportunity cost caused by intertemporal scarcity
is called the marginal user cost (MUC).
The marginal user cost for each period in an efficient
market is the difference between the price and the
marginal extraction cost.
 Scarcity
rent is producer surplus that
exists in the long run due to fixed supply
or increasing costs



Assume the demand conditions are the same, but let
the discounted rate be 0 and the marginal cost of
extraction be $4. Total supply available = 20. How
much would be produced in each period in an efficient
allocation?
What would be the marginal user cost in each period?
Would the static and dynamic efficiency criteria yield
the same answers for this problem? Why?



Assume the demand conditions are the same, but let
the discounted rate be 0.1 and the marginal cost of
extraction be $4. Total supply available = 10. How
much would be produced in each period in an efficient
allocation?
What would be the marginal user cost in each period?
Would the static and dynamic efficiency criteria yield
the same answers for this problem? Why?
 The Two-Period
Model Revisited
• Dynamic efficiency is the primary criterion
when allocating resources over time.
• An n-period model presented uses the same
numerical example as before, but extends the
time horizon and increases the recoverable
supply from 20 to 40, and a Marginal Cost of $2,
and r=.10.
 Homework
#5 Due Monday
 Homework
#6 Due Oct. 22
 Extra
Credit Writing Assignment Oct.
17th
 Writing Assignment Due Oct. 24th