Suppose an exhaustible resource can be sold only this period or in the next period.The marginal cost of extraction is constant and equal to $10.The next year price of the resource is $115,respectively.The interest rate is 5%.What is the minimum current price required to make the sale of the resource profitable in the current period?

Question

Quizplus · Accepted Answer

To make the sale profitable now, the current price must be at least equal to the present value of the future price minus the marginal cost. The future price is $115, and the present value of this price is $115 / (1 + 0.05) = $109.52. Adding the marginal cost of $10 gives a minimum current price of approximately $110.

Suppose an Exhaustible Resource Can Be Sold Only This Period