Supplementary Exercises > Exhaustible and Recyclable Resources

Constant costs with a backstop resources

Consider a resource that is to be used during two periods. In the first period, demand for the good is given by P1=100-Q1 and in the second period it is given by P2=140-Q2. There are 150 units of the good to be divided and it is available at zero cost. You may assume that the interest rate is 100%.

  1. Find the efficient allocation. What is the price and quantity in each period?
  2. Now calculate how the situation would change if a backstop were available at a cost of $30.
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Peter J Wilcoxen, The Maxwell School, Syracuse University
Revised 04/21/2006