Macroeconomics Exam Review 225

Macroeconomics Exam Review 225 - Chapter 5: Optimization...

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: Chapter 5: Optimization 5.1 As stated, this problem has no optimal solution. Revenue ( ) increases without bound as the rate of exploitation gets smaller and smaller. Given any positive ex- ploitation rate , a smaller rate will increase total revenue. Nonexistence arises from inadequacy in modeling the island leaders problem. For example, the model ignores any costs of extraction and sale. Realistically, we would expect per-unit costs to de- crease with volume (increasing returns to scale) at least over lower outputs. Extraction and transaction costs should make vanishingly small rates of output prohibitively ex- pensive and encourage faster utilization. Secondly, even if the government weights future generations equally with the current generation, it would be rational to value current revenue more highly than future revenue and discount future returns. Dis- counting is appropriate for two reasons Current revenues can be invested to provide a future return. There is an oppor-Current revenues can be invested to provide a future return....
View Full Document

This note was uploaded on 01/16/2012 for the course ECO 2024 taught by Professor Dr.dumond during the Fall '10 term at FSU.

Ask a homework question - tutors are online