Appendix 15.

2 The monopolist’s profit-maximising extraction

programme

To solve for the monopolist’s profit-maximising extraction programme, we need to do some

additional calculation. First, let us derive an expression for the firm’s marginal profit function, M:

 t   P  R  Rt  Pt
M t    Rt  P( R) (15.18)
Rt Rt Rt

Now, substituting for P(R) from the resource demand function (equation 15.8) we can express this

equation as

M  t   aRt Ke aRt  Ke aRt

(15.19)
 K (aRt  1)e aRt  Ke ahRt

where h = 2.5. Notice the approximation here. We use this because otherwise it is not possible to

obtain an analytical solution, given the double appearance of Rt.

Since resource extraction at the end of the planning horizon must be zero (RT = 0) we have

Mt = Ke–ahR(T) = K (15.20)

To obtain M0, using equation 15.9 we obtain

M0 = MT e–iT = Ke–iT (15.21)

To obtain an expression for Mt, using equations 15.9 and 15.21, we have

Mt = M0 eit = Kei(t–T) (15.22)

1
Now we may obtain a solution equation for Rt, using equations 15.9 and 15.22:

Ke ahR  Kei ( t T )

t

implying that

i( t  T )  ahRt

i
 Rt  T  t  (15.23)
ha

In order to obtain the optimal depletion time period T we use the fixed-stock constraint together with

equation 15.23, the result we have just obtained:

 R dt  S
0
t

T
i
 T  t  dt  S
0
ha
r
i  t2 
 Tt    S
ha  2 0
1 i 2
r S
2 ha

Therefore

2Sha
T
i

2
To solve the initial extraction R0, from equation 15.22:

i iT 2iS
R0  T  0   
ha ha ha

Finally, to solve the initial net price P0, from equation 15.8, (the demand curve)

 2iSa 
P0  Ke  aR0
 K exp   
 h 
 