Suppose that there are 2,000 units of a non-renewable resource available over two periods. Demand in each period is given by P = 4,000 - Q. Marginal Cost is a constant $200 in each period. The discount rate is 10 percent.
a. What is the dynamically efficient allocation of the 2,000 units of the resource, and what will be the price of the resource in each period?
b. Suppose that the basic setup of the problem remains the same, except that now the discount rate rises to 25 percent. Re-compute the dynamically efficient allocation of the 2,000 units of the resource including the price each period.
c. On one graph illustrate your answers to parts (a) and (b).
d. On your graph from part (c) show the marginal user cost of the resource explaining what this means and why it differs as the discount rate changes.