Markets: A Rigorous Course

M10 · Problem 7 ★★ Check

Hotelling with linear demand

Inverse demand is p=a−qp = a - q with choke price aa, extraction is costless, the interest rate is rr and the reserve is R0R_0. (a) Show that the competitive price path is pt=aer(t−T∗)p_t = a e^{r(t - T^*)} for t≤T∗t \le T^* and derive the equation determining the exhaustion date T∗T^*. (b) Solve numerically for a=100a = 100, r=5%r = 5\%, R0=1000R_0 = 1000. Report T∗T^*, p0p_0 and q0q_0. (c) Show that T∗T^* increases with R0R_0 and that p0p_0 falls with R0R_0.

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Commas, ₹, % and 1e-3 notation are accepted.

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