Dynamic efficiency refers to an allocation such that no further shuffling of extraction across periods will increase the sum of the present discounted values of the firm’s stream of future profits. If there are just two periods in the story, explain why the allocation of a scarce exhaustible resource that maximizes the present discounted value of profits across two periods will involve more extraction in the first period and less extraction in the second period, rather than an equal amount in both periods.

Dynamic efficiency refers to an allocation such that no further shuffling of extraction across periods will increase the sum of the present discounted values of the firm’s stream of future profits. If there are just two periods in the story, explain why the allocation of a scarce exhaustible resource that maximizes the present discounted value of profits across two periods will involve more extraction in the first period and less extraction in the second period, rather than an equal amount in both periods.

Microeconomics: Principles & Policy

14th Edition

ISBN:9781337794992

Author:William J. Baumol, Alan S. Blinder, John L. Solow

Publisher:William J. Baumol, Alan S. Blinder, John L. Solow

Chapter7: Production, Inputs, And Cost: Building Blocks For Supply Analysis

Section: Chapter Questions

Problem 9TY

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