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Exhaustible Resources and Optimal Depletion

Description: This quiz covers the concept of exhaustible resources and optimal depletion in economics.
Number of Questions: 15
Created by:
Tags: economics resource economics exhaustible resources optimal depletion
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What is an exhaustible resource?

  1. A resource that can be replenished naturally.

  2. A resource that is available in limited quantities.

  3. A resource that is not affected by human activity.

  4. A resource that is evenly distributed across the globe.

Show answer
Correct Option: B
Explanation:

Exhaustible resources are those that are finite in quantity and cannot be replenished naturally at a rate comparable to their rate of consumption.

What is the Hotelling rule for optimal depletion of an exhaustible resource?

  1. The rate of extraction should be equal to the rate of natural replenishment.

  2. The rate of extraction should be equal to the rate of technological progress.

  3. The rate of extraction should be equal to the rate of interest.

  4. The rate of extraction should be equal to the rate of population growth.

Show answer
Correct Option: C
Explanation:

The Hotelling rule states that the optimal rate of extraction of an exhaustible resource is equal to the rate of interest, so that the present value of the resource is maximized.

What is the effect of a technological innovation on the optimal depletion path of an exhaustible resource?

  1. It increases the optimal rate of extraction.

  2. It decreases the optimal rate of extraction.

  3. It has no effect on the optimal rate of extraction.

  4. It makes the optimal rate of extraction indeterminate.

Show answer
Correct Option: B
Explanation:

A technological innovation that reduces the cost of extraction or increases the demand for the resource will decrease the optimal rate of extraction, as it makes the resource more valuable in the future.

What is the effect of an increase in the rate of interest on the optimal depletion path of an exhaustible resource?

  1. It increases the optimal rate of extraction.

  2. It decreases the optimal rate of extraction.

  3. It has no effect on the optimal rate of extraction.

  4. It makes the optimal rate of extraction indeterminate.

Show answer
Correct Option: A
Explanation:

An increase in the rate of interest increases the opportunity cost of holding the resource in the ground, which leads to a higher optimal rate of extraction.

What is the effect of an increase in the demand for an exhaustible resource on the optimal depletion path?

  1. It increases the optimal rate of extraction.

  2. It decreases the optimal rate of extraction.

  3. It has no effect on the optimal rate of extraction.

  4. It makes the optimal rate of extraction indeterminate.

Show answer
Correct Option: A
Explanation:

An increase in demand for an exhaustible resource will increase its price, which will lead to a higher optimal rate of extraction.

What is the effect of an increase in the supply of an exhaustible resource on the optimal depletion path?

  1. It increases the optimal rate of extraction.

  2. It decreases the optimal rate of extraction.

  3. It has no effect on the optimal rate of extraction.

  4. It makes the optimal rate of extraction indeterminate.

Show answer
Correct Option: B
Explanation:

An increase in the supply of an exhaustible resource will decrease its price, which will lead to a lower optimal rate of extraction.

What is the effect of an increase in the population on the optimal depletion path of an exhaustible resource?

  1. It increases the optimal rate of extraction.

  2. It decreases the optimal rate of extraction.

  3. It has no effect on the optimal rate of extraction.

  4. It makes the optimal rate of extraction indeterminate.

Show answer
Correct Option: A
Explanation:

An increase in population will increase the demand for the resource, which will lead to a higher optimal rate of extraction.

What is the effect of an increase in the stock of an exhaustible resource on the optimal depletion path?

  1. It increases the optimal rate of extraction.

  2. It decreases the optimal rate of extraction.

  3. It has no effect on the optimal rate of extraction.

  4. It makes the optimal rate of extraction indeterminate.

Show answer
Correct Option: B
Explanation:

An increase in the stock of an exhaustible resource will decrease its scarcity, which will lead to a lower optimal rate of extraction.

What is the effect of an increase in the cost of extraction on the optimal depletion path of an exhaustible resource?

  1. It increases the optimal rate of extraction.

  2. It decreases the optimal rate of extraction.

  3. It has no effect on the optimal rate of extraction.

  4. It makes the optimal rate of extraction indeterminate.

Show answer
Correct Option: B
Explanation:

An increase in the cost of extraction will decrease the profitability of extracting the resource, which will lead to a lower optimal rate of extraction.

What is the effect of an increase in the environmental cost of extraction on the optimal depletion path of an exhaustible resource?

  1. It increases the optimal rate of extraction.

  2. It decreases the optimal rate of extraction.

  3. It has no effect on the optimal rate of extraction.

  4. It makes the optimal rate of extraction indeterminate.

Show answer
Correct Option: B
Explanation:

An increase in the environmental cost of extraction will increase the cost of extracting the resource, which will lead to a lower optimal rate of extraction.

What is the effect of an increase in the uncertainty of future prices on the optimal depletion path of an exhaustible resource?

  1. It increases the optimal rate of extraction.

  2. It decreases the optimal rate of extraction.

  3. It has no effect on the optimal rate of extraction.

  4. It makes the optimal rate of extraction indeterminate.

Show answer
Correct Option: B
Explanation:

An increase in the uncertainty of future prices will make it more risky to extract the resource, which will lead to a lower optimal rate of extraction.

What is the effect of an increase in the uncertainty of future demand on the optimal depletion path of an exhaustible resource?

  1. It increases the optimal rate of extraction.

  2. It decreases the optimal rate of extraction.

  3. It has no effect on the optimal rate of extraction.

  4. It makes the optimal rate of extraction indeterminate.

Show answer
Correct Option: B
Explanation:

An increase in the uncertainty of future demand will make it more risky to extract the resource, which will lead to a lower optimal rate of extraction.

What is the effect of an increase in the uncertainty of future technology on the optimal depletion path of an exhaustible resource?

  1. It increases the optimal rate of extraction.

  2. It decreases the optimal rate of extraction.

  3. It has no effect on the optimal rate of extraction.

  4. It makes the optimal rate of extraction indeterminate.

Show answer
Correct Option: B
Explanation:

An increase in the uncertainty of future technology will make it more risky to extract the resource, which will lead to a lower optimal rate of extraction.

What is the effect of an increase in the uncertainty of future policy on the optimal depletion path of an exhaustible resource?

  1. It increases the optimal rate of extraction.

  2. It decreases the optimal rate of extraction.

  3. It has no effect on the optimal rate of extraction.

  4. It makes the optimal rate of extraction indeterminate.

Show answer
Correct Option: B
Explanation:

An increase in the uncertainty of future policy will make it more risky to extract the resource, which will lead to a lower optimal rate of extraction.

What is the effect of an increase in the uncertainty of future environmental regulations on the optimal depletion path of an exhaustible resource?

  1. It increases the optimal rate of extraction.

  2. It decreases the optimal rate of extraction.

  3. It has no effect on the optimal rate of extraction.

  4. It makes the optimal rate of extraction indeterminate.

Show answer
Correct Option: B
Explanation:

An increase in the uncertainty of future environmental regulations will make it more risky to extract the resource, which will lead to a lower optimal rate of extraction.

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