Suppose the consumption of gold offers people a marginal utility that diminishes

Question

Suppose the consumption of gold offers people a marginal utility that diminishes as that person consumes more gold. Assume also that gold can be mined in unlimited amounts at the constant marginal costs, X (or chi), units of the nongold consuption good.

a) can the trading value of gold exceed X in equilibrium? Explain. What is the effect on gold consumption and mining of an increased use of gold as money?

b) Suppose instead that the marginal mining cost increases with the amount mined. What is now the effect on gold consumption and mining of an increased use of gold as money?

Explanation / Answer

a. Since the Marginal cost of the good is constant, the trading value of the good will exceed X in equilibrium. Both the consumption and minimg will increase with the increased use pof gold as money.

b. The equilibrium amount of quantity transacted will be less than in the previous case as the MC is rising. Gold consumption and mining will fall.

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