The spread between price and marginal cost of an exhaustible resource must grow by the rate of interest so that
A) resource owners earn a profit.
B) resource owners are willing to sell some of the resource in the future.
C) the price of the resource remains constant in real terms.
D) the marginal cost of extracting the resource declines.

Question

Quizplus · Accepted Answer

The spread between price and marginal cost of an exhaustible resource must grow by the rate of interest so that resource owners are willing to sell some of the resource in the future. This is because the higher price in the future will compensate for the interest cost of holding onto the resource. Therefore, the spread between price and marginal cost must increase by the rate of interest to incentivize resource owners to sell some of the resource in the future.

The Spread Between Price and Marginal Cost of an Exhaustible