3. [Lecture: Introduction to Resource Economics] (a) What is the difference betw

Question

3. [Lecture: Introduction to Resource Economics] (a) What is the difference between a non-renewable resource and a renewable resource. Give an example of each type of resource. What is meant by calling these “natural” assets? (b) A reclusive billionaire owns five Picasso paintings which he keeps stored in a vault because of his fear that it might be stolen. His nephew urges him to sell the paintings. However, possibly to spite the nephew, he decides not to sell the Picassos and to leave them in storage for one more year. What economic return does he earn by this decision? (c) Would your answer be any different if, instead of keeping the paintings in a vault, he hung them in the living room of his apartment in the Trump Tower? (d) The billionaire also owns 250 acres of oil fields in Wyoming. The same nephew urges him to sell that acreage. Instead he decides to keep owning Wyoming acreage for one more year. What economic return does he earn by this decision? (e) The billionaire also owns a herd of 4,000 bison in Montana. The nephew urges him to sell the herd of bison. Instead he decides to keep owning the bison for one more year. What economic return does he earn by this decision? (f) The next year, he does listen to his nephew and he agrees that he could reallocate some of holdings, increasing or decreasing the amount of each type of asset that he owns. What economic rule should he follow in rebalancing his portfolio of assets?

Explanation / Answer

Looking at the scenario given above we can definitely say that the Uncle and his nephew doesn't share a very cordial relation among them. Coming back to the question

a) Renewable resources are those which can be renewed easily and are available in abundance in nature. If they are finished or completely consumed they can be regenerated easily. Examples of renewable sources are solar energy, wind energy etc.

On the other hand, non-renewable sources of energy are those which if finished can't be generated back easily and takes millions of years to be formed again. Examples of Non-renewable sources are coal, petrol, minerals etc.

b) The reclusive billionaire has kept Picasso painting in his storehouse, doing so will not give him any economic benefit to him. As the value of painting doesn't diminish or increase over time even when kept in the storeroom. But if the painting s in the storeroom are not very well preserved this might harm the quality of paintings and reduce its price considerably because it's a fragile product.

c) Yes, things will change if he has hung those paintings in his living room in Trump Tower. There the paintings will be visible to everyone coming that may increase the demand for those paintings as more and more people may be interested to buy it. The recluse billionaire can sell those painting to the person offering highest price.

d) The oil field prices are going to increase or decrease depending on the demand for oil in the present market. If next year the demand for oil is more than the present time he could fetch a better price for those oil wells but if the demand for oil is less next year he will get a less as compared to the present year.

e) The Bisons will not remain as strong as they are right now they are going to age. Next year they might be weaker than they are right now this would fetch him a lesser price for Bisons.

f) I would advise the billionaire to invest in those things whose demand are not going to diminish in the future and those things are not going to lose its value with time like a bison would do. I would recommend him to buy more Oil wells and lose those paintings and bisons.  

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