Question: 1. Suppose the inverse demand function for the depletable resource is P = 8 - 0.4q and the marginal cost of supplying it is $4.

1. Suppose the inverse demand function for the depletable resource is P = 8 - 0.4q and the marginal

cost of supplying it is $4.

(a) If 20 units are to be allocated between two periods, in a dynamic efficient allocation

how much would be allocated to the first period and how much to the second period

when the discount rate is zero?

(b) Given this discount rate what would be the efficient price in the two periods?

(c) What would be the marginal user cost in each period?

2. Assume the same demand conditions as stated in Question 1 above but let the discount rate be

0.20. How much would be produced in each period in an efficient allocation? What would be the

price and marginal user cost in each period? Would the static and dynamic efficiency criteria yield

the same answers for this problem? Why?

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