Economics 20th Edition by Campbell McConnell ,Stanley Brue ,Sean Flynn

Exercise 6

Recall the model of nonrenewable resource extraction presented in Figure 15.7. Suppose that a technobreak through means that extraction costs will fall in the future (but not in the present). What will this do to future profits and, therefore, to current user cost? Will current extraction increase or decrease? Compare this to a situation where future extraction costs remain unchanged but current extraction costs fall. In this situation, does current extraction increase or decrease? Does the firm's behavior make sense in both situations? That is, does its response to the changes in production costs in each case maximize the firm's stream of profits over time? L04