Estimate the equation which relates the equilibrium price, Macroeconomics

The inhabitants of Fantasia live for two periods, 0 and 1. They consume a nonrenewable resource called Fantasium in each period. Fantasium has to be extracted from the ground and the (constant) marginal cost of extraction is $4/unit. The total available supply of Fantasium in the ground is 22 units and you should assume that the entire amount will be consumed over the two periods. The market demand curve for Fantasium in period 0 is given by P0 = 10 - Q0 + M and in period 1 this demand curve is given by P1 = 10 - Q1 + M, where Pi is price in period i, Qi is quantity demanded in period i (i = 0, 1), and M is Fantasia's national income in each period. Assume that there are many identical firms extracting Fantasium in every period, each firm has perfect foresight about prices, each firm discounts profits at the rate of 50%, and M = 20.

(a) Use Hotelling's Rule to get an equation which relates the equilibrium price in period 0 (i.e., P0) to the equilibrium price in period 1 (i.e., P1).

(b) Use the market demand curve in each period and your answer to 3(a) to get an equation which relates the equilibrium quantities Q0 and Q1. Use this equation and the constraint on total available supply of Fantasium to solve for the equilibrium quantities of Q0 and Q1.

(c) Use your answers to 3(b) in the demand curve for each period to get equilibrium values of P0 and P1.

(d) What would be the equilibrium values of Q0 and Q1 if the rate of discount was 100% instead of 50% ?

(e) What would be the equilibrium values of Q0 and Q1 if the rate of discount was 50% but the marginal cost of extraction of Fantasium was $14/unit instead of $4/unit ?

(f) What would be the equilibrium values of Q0 and Q1 if the rate of discount was 50%, the marginal cost of extraction of Fantasium was $4/unit, but M was 40 instead of 20 ?

Posted Date: 3/19/2013 6:02:25 AM | Location : United States







Related Discussions:- Estimate the equation which relates the equilibrium price, Assignment Help, Ask Question on Estimate the equation which relates the equilibrium price, Get Answer, Expert's Help, Estimate the equation which relates the equilibrium price Discussions

Write discussion on Estimate the equation which relates the equilibrium price
Your posts are moderated
Related Questions
what are the factors effecting reciprocal demand?

give three example of models show endogenous and exogenous varibles

The short-run supply of a certain crop is perfectly inelastic, because it has already been harvested and no more of it can be grown until the next growing season. In order to raise

What is the difference between Comparative Advantage and Absolute Advantage? Difference between Comparative Advantage and Absolute Advantage: Comparative advantage: it is

By what percentage did the price level, as measured by this index, rise between 1984 and 2005?

What factors shift out the PPC and what is the opportunity cost of the economy moving out to get back on the PPC? Explain?

critically analyse the ways at which the govement of zimbabwe has put in place to address unequal employment opportunitiesbetween men andwomen

Give an example of how the Principle of Opportunity Cost applies to your life. Think of a recent decision you made. It could be a decision as simple as whether to eat out or cook y

Suppose the country club bills based on a sample of 4 members are: 383, 1,051, 637, 928. What is the standard deviation for this sample of bills? (please round your answer to 1 dec

This release also states that the Federal Reserve is in the process of purchasing $1.25 trillion of agency mortgage-backed securities and about $175 billion of agency debt. Additio