How does the price system cope with depletable resources?
The rule is that under perfect competition, when the cost of transportation and extraction are negligible, resource prices should rise at the rate of interest. The reasoning is that the owner of a stock of the resource has the choice to sell the stock and invest the proceeds at the market rate of interest or hold the stock in anticipation of a future price increase. The owner will be indifferent between these when the rate of price increase in the resource equals the interest rate on monetary investments. If the rate of price increase exceeds the interest rate, the owner will hold the stock (as will all other owners), which will raise the price at present, but will create a large supply for future sale and depress the future price. This could create an arbitrage opportunity, which would force the rate of price increase to fall. Conversely, if the rate of price increase is less than the interest rate, the owner will sell the stock and invest the proceeds. The price of the resource will fall at present, but the future price will rise to a higher level. Again, an arbitrage opportunity will force the rate of price increase to rise.
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What will be an ideal response?
A vertical line showing the economy's potential is called the:
A. aggregate demand curve. B. long-run aggregate supply line. C. short-run aggregate supply line. D. short-run equilibrium output line.