(a) State the assumptions and main results of Hotelling's model of a perfectly competitive nonrenewable energy...

 

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(a) State the assumptions and main results of Hotelling's model of a perfectly competitive nonrenewable energy resource industry. (b) Why does price exceed marginal cost of extraction in this model (even though the industry is perfectly competitive)? Also, why does the gap between price and marginal cost keep increasing over time? Answer these questions using economic reasoning. 3. Suppose that a limited supply of coal is available to be extracted as fuel over two time periods by a perfectly competitive industry, with demand curves given by P = 40-2Q1 and P2 = 40 2Q2, where Q1 and Q2 denote the respective quantities sold in periods 1 and 2. The marginal cost of extracting coal is MC = 4 in both time periods. The total amount of coal available, X, is 10 units and the rate of discount is 40% (i.e., r = 0.4). (a) Compute the market equilibrium values of quantity sold and associated price of coal in each time period. (b) Calculate the marginal user cost (MUC) of coal in each time period. Why is MUC higher in period 2? 4. In the context of the two-period model in Question3, use a set of diagrams to depict and explain the likely effects of the following parameter changes on the market equilibrium price and quantity in each time period: 5. (i) A decrease in the discount rate, r (ii) A decrease in the resource stock, TQ (iii) A decrease in the choke price, a. (a) Assume that a fossil fuel is bought and sold in a competitive market over two time periods, but its consumption results in pollution. What would be the differences between the socially desirable and perfectly competitive levels of output in each time period? Explain with the help of economic reasoning and suitable diagrams. (b) Design a regulatory policy to correct the market failure in 5(a). (a) State the assumptions and main results of Hotelling's model of a perfectly competitive nonrenewable energy resource industry. (b) Why does price exceed marginal cost of extraction in this model (even though the industry is perfectly competitive)? Also, why does the gap between price and marginal cost keep increasing over time? Answer these questions using economic reasoning. 3. Suppose that a limited supply of coal is available to be extracted as fuel over two time periods by a perfectly competitive industry, with demand curves given by P = 40-2Q1 and P2 = 40 2Q2, where Q1 and Q2 denote the respective quantities sold in periods 1 and 2. The marginal cost of extracting coal is MC = 4 in both time periods. The total amount of coal available, X, is 10 units and the rate of discount is 40% (i.e., r = 0.4). (a) Compute the market equilibrium values of quantity sold and associated price of coal in each time period. (b) Calculate the marginal user cost (MUC) of coal in each time period. Why is MUC higher in period 2? 4. In the context of the two-period model in Question3, use a set of diagrams to depict and explain the likely effects of the following parameter changes on the market equilibrium price and quantity in each time period: 5. (i) A decrease in the discount rate, r (ii) A decrease in the resource stock, TQ (iii) A decrease in the choke price, a. (a) Assume that a fossil fuel is bought and sold in a competitive market over two time periods, but its consumption results in pollution. What would be the differences between the socially desirable and perfectly competitive levels of output in each time period? Explain with the help of economic reasoning and suitable diagrams. (b) Design a regulatory policy to correct the market failure in 5(a).