Part II - Baier
1. Non-renewable resource extraction
A known, finite copper stock will be exploited over a period of time (t=30 years).
Utility comes directly from consuming the resource R in each period, no negative external extraction effects are considered, though extraction involves cost C.
a) Show 3 possible extraction cost paths (graphically) and interpret their effect on gross / net price of the resource
b) Distinguish between gross- and net benefit of the resource (in words or mathematically)
c) Copper can be essential for certain production functions; show the shapes of production function for industries (graphically) in which copper is essential, perfectly substitutable and substitutable.
d) Explain in words the meaning of the Hotelling’s rule for extraction of copper.
Distinguish between the return to physical capital (= interest rate i) and the social discount rate.
e) Applied to copper, what incentives could miners have to extract most copper in the first 10 years?
f) Given a resource net price P in which increases as the stock decreases (scarcity assumption), choke price K and an decreasing demand function with increasing net price, show graphically and explain the effect on price and depletion horizon when the interest rate i rises
g) Would a monopolist set the initial net price higher or lower than the competitive market price? What effect would this have on the depletion horizon?
h) Imagine frequent new copper discoveries. Show graphically how this will affect the net price path. Explain in words the effect on Demand including choke price and under which circumstances the choke price will be reached.
i) Copper roofs become hip! Everybody wants to have one. How will this affect net price and depletion horizon? Show graphically and explain.
j) Glass fiber cables become much cheaper and more efficient than copper cables; If this is considered as backstop price fall, show graphically and explain what happens to the copper stock and the net price path.
k) Extraction cost rise. How will this affect the net price path?
l) Discuss how risks and uncertainty on copper extraction could look like; what might be possible price effects? Explain.
m) Discuss at least 3 problems that arise when applying the Hotelling’s model to reality.
2. Renewable resource extraction 3. Discussion Questions
