Suppose your uncle gave you an oil well like the one described in Section 15.8. (Marginal production cost is constant at $50.) The price of oil is currently $80 but is controlled by a cartel that accounts for a large fraction of total production. Should you produce and sell all your oil now or wait to produce? Explain your answer.You are planning to invest in fine wine. Each case costs $100, and you know from experience that the value of a case of wine held for t years is 100t1/2. One hundred cases of wine are available for sale, and the interest rate is 10 percent.
a. How many cases should you buy, how long should you wait to sell them, and how much money will you receive at the time of their sale?
b. Suppose that at the time of purchase, someone offers you $130 per case immediately. Should you take the offer?
c. How would your answers change if the interest rate were only 5 percent?