Socially efficient price in the two years

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BC's land base is 95 million hectares and forests cover 62% (55 million hectares) of the province. BC is Canada's most ecologically diverse province, with temperate rainforests, dry pine forests, alpine meadows, and more. But only 24% (22 million hectares) of these forests is available for harvesting. Of that amount, only 200,000 hectares - or less than 1% - are harvested on an annual basis.

Suppose the demand curve for raw materials from the forests is Qd = 50 - 0.5P, where Q is the units of raw materials produced from the forests and P is the price of raw materials in dollars. The marginal cost of supply is $40 (Here we ignore any externalities). Please complete questions of Part I and II.

Part I.

Now we assume that this two curves represent the marginal current benefits (MB=MCB) and the marginal current costs (MC=MCC) respectively. Also assume that the user costs equal UC=2Q (note that the user costs are positive).

(a). Calculate the socially efficient level of quantity of raw materials produced inter- temporally. Please use a graph to illustrate it.

(b). If the current quantity of output equals 25, please find the inter-temporal marginal net benefit from an increase in current output at this point.

Part II.

Now we assume another situation: if 39 units of raw materials are to be allocated between two years (Note: we still have MB=MCB and MC=MCC, but we do not know UC in this case).

(c). How much would be distributed to the first year and the second year respectively, if a dynamic efficiency is achieved? Given the interest rate is 0.10.

(d). What is the socially efficient price in the two years?

(e). What is the UC in each year?

Reference no: EM131228989

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