Answer:
From the provided information, during 2002-2012, country U is using alternate fuel i.e. natural gas as this resource availability is plentiful in the country NA.
When country U requires resources like crude oil and gasoline, country S increased the prices on gasoline. Indeed, country U applied same policy for the prices of natural gas. As a result, crude oil prices were lowered by Saudi and more oil is extracted for supply.
Answer:
The production function is:
represents the labor elasticity for production.
represents the elasticity of non-labor.
represents the capital elasticity of production.
represents the returns to scale. If
, then the production function represents increasing returns to scale. If
, then the production function represents constant returns to scale. If
, then the production function represents decreasing returns to scale.
a) Petroleum, primary metals shows decreasing returns to scale. Decreasing returns to scale occurs when
. This means that if
, L n and
are increased by 'a' times, then the increase in output is less than 'a' times.
b) Textiles represents constant returns to scale. Constant returns to scale arises when
. This means that if
,
and
are increased by 'a' times, then the increase in output is exactly equal to 'a' times.
c) This is true for primary metals. This occurs when
is largest. Higher
represents higher output elasticity for capital which means that % change in output is higher due to percentage change in capital input.
d) This is true for stone, clay, etc. This occurs when
is largest. Higher
represents output elasticity for production labor which means that percentage change in output is higher due to percentage change in production labor input.
Answer:
The oil field owner has two options. Firstly, more oil can be extracted once and sold at market price. Secondly, oil can be extracted when it is required. This option again depends on the two variables, i.e. oil price and interest rates.
Suppose interest rates are lower than the price of the oil. For instance, the price of the oil increases by 4 percent by year and the interest rate is only 2 percent. Then, oilfield owner would like to reduce the rate of extraction of oil. Extraction of more oil when the interest rate is low does not give good returns to the owner. Thus, oil holding underneath increases the value rather than extraction. This scenario is vice versa when interest rates are higher than the price of the oil.