550 words economic 4day/Exercise 1 Natural Resource Economics

Order Description

Exercise 1

Natural Resource Economics

2014-15

Do the following exercise using excel and explain the results intuitively (very briefly) in words. Then submit your work (the excel file + the word file + diagram, if any) using Turnitin.

Suppose we are now at the start of year t = 0. We believe that the world will end in 20 years time. Whatever happens after year t = 19 is deemed to be irrelevant to human well-being. An initial stock of 100 (million tons, say) of a non-renewable resource exists. The problem is to decide how this stock is to be used over the 20 years.

We assume a non-linear demand function,

P(R) = Ke-aR , where a = 0.2 and K = 100.

We wish to maximise the sum of discounted utility over the specified time period by choosing an optimal extraction path. Assume, the discount rate is 10%. Using Excel Solver, find out the optimal time path of R. Now plot two charts: the resource net price and the resource usage, over the relevant time periods.

Now, do the above process again with the following change in the model: a decrease in the discount rate from 10% to 5%.

Intuitively (briefly) explain your results.