Your aunt owns a gold mine. The marginal extraction cost of gold is $25 and remains constant over time. The current market price of a unit of gold is $200. Your aunt's appropriate discount rate is 12%
Next year, your aunt expects the price of a unit of gold to be $222. Should your aunt extract any gold from the mine this year?
No, she should not extract and sell any gold currently. This is because the return on the gold left in the mine exceeds her discount rate. That is,
(Pt+1 - c) > (1 + r)( Pt - c) → (222 - 25 ) > (1.12 )(200 - 25 ).
You might also like to view...
The ECB has the following mandates, EXCEPT:
A) use interest rates to implement the policy of price stability. B) use monetary policy to fulfill objectives of the European Union community. C) not be under the jurisdiction of any other European Union institution. D) finance deficits of member countries when needed.
Suppose the price of a good rises. The income effect
A) shows the change in consumption that results from the change in relative price while staying on the same indifference curve. B) shows the change in consumption that results from the change in relative price while keeping income constant. C) is shown by decreasing income at the new relative price in order to move from the old indifference curve to the new indifference curve after the price change. D) is shown by increasing income at the new relative price in order to move from the old indifference curve to the new indifference curve after the price change.