1
ECON/FRE 374 – Practice Questions for Midterm
Questions:
1)
Consider a threeperiod model of nonrenewable resource extraction. Lay out the
maximization problem in a way analogous to the twoperiod model in the lecture
notes, and determine the explicit expression for user cost.
2)
Consider the extraction of a known stock problem for nonrenewable resource.
Assume the existence of only two periods: t
0
and t
1
. Let the (inverse) demand
functions of the two periods be:
p
0
= 15 –
q
0
and
p
1
= 15 –
q
1
. Let the marginal
extraction costs be
MC
0
= 5 +
q
0
and
MC
1
= 5 +
q
1
. And let the rate of discount
r
=
0.05.
a)
If there is no limitation on the total quantity of this nonrenewable resource, what
is the socially optimal extraction each period? (Show both graphically and
numerically).
b)
Now suppose there is a limitation on the total quantity of this nonrenewable
resource:
q
0
+ q
1
≤
8. What are the optimal extraction at t0 and optimal extraction
at t
1
? (Show both graphically and numerically)
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 Spring '10
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 Economics, Supply And Demand, producer, nonrenewable resource

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