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Homework #6 Due Oct. 25 Quiz #3 Oct. 27th Writing Assignment Due Oct. 27 th Exam #3 Thursday Nov. 3rd

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Explain why we will likely never run out of a non-renewable resource such as oil. Does this also imply that we will always be able to extract all the oil we need? Explain.

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What has been the general trend in non- renewable resource prices in the past several decades? What has generally been responsible for this trend? Is this trend consistent with Hotellings rule? Discuss.

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Physical supply - available reserves measured in physical terms without regard for cost and value Economics supply the amount of a resource that is available based on current prices and technology

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Identified reserves the identified quantity of a resources; includes both economic and subeconomic reserves Indicated or inferred resources that have been identified but whose exact quantity is not known with certainty

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Hypothetical the quantity of a resource not identified with certainty but hypothesized to exist Speculative the location and quantity of a resource has not been identified but is hypothesized to exist

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Subeconomic resources resources whose costs of extraction are too high to make production worthwhile Economic reserves resources of high enough quality to be profitably produced and are identified

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Changes to reserves The resources is extracted and used => diminished reserves New resource deposits are discovered => increasing reserves Changing price and technology can make more or less of the known reserves economically viable

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http://en.wikipedia.org/wiki/The_Limits_to _Growth http://en.wikipedia.org/wiki/The_Limits_to _Growth Written in 1972, predicting over use of resources http://en.wikipedia.org/wiki/The_Populatio n_Bomb http://en.wikipedia.org/wiki/The_Populatio n_Bomb Written in 1968, predicting a population crash due to resource scarcity The wager : http://en.wikipedia.org/wiki/Simon%E2%80%93Eh rlich_wager

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R=P-MC PV [R] = R 0 + R 1 /(1+r) + R 2 /(1+r) 2 + Optimal extraction quantity R 0 = R 1 /(1+r) = R 2 /(1+r) 2 = Hotellings Rule - net price rises over time with the rate of interest.

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Choke price the minimum price of a good or service that would result in a zero quantity demanded Price path the price of a resource over time Extraction path the extraction rate of a resource over time

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For this case, the marginal user cost declines over time and reaches zero at the transition point. The resource reserve is not exhausted. The marginal cost of exploration can be expected to rise over time as well. Successful exploration would cause a smaller and slower decline in consumption while dampening the rise in total marginal cost.

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Technology Decreases marginal cost of extraction Higher quality resources will be extracted first. => subeconomic resources may become economic when the price rises or technology improves

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Technological progress would also reduce the cost of extraction. Lowering the future marginal cost of extraction would move the transition time further into the future. Total marginal cost could actually fall with large advances in technology.

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The transition can for two depletables with different marginal costs will also be a smooth one. The rate of increase of total marginal cost slows down after the time of transition because the marginal user cost represents a smaller portion of total marginal cost for the second, higher cost resource.

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An efficient allocation thus implies a smooth transition to exhaustion and/or to a renewable substitute. The transition point to the renewable substitute is called the switch point. At the switch point the total marginal cost of the depletable resource equals the marginal cost of the substitute.

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