1) What should happen to the extraction (usage) rate of iron ore when
a. more iron ore is found.
b. less iron is used in the manufacturing of steel.
2. There are two general methods that governments use to sell mineral rights to the private sector. One is production royalties where the private firm promises to pay a certain amount (or percentage of revenue) each year for the length of contract. The other is bonus bidding where the private company pays cash up from the mineral rights for a specified period of time.
A government is offering a 10 year contract for off-shore drilling rights. The highest bonus bid is $5 million dollars. However, another firm offers to $800,000 per year for 10 years in production royalties.
a. What is the PV of the bonus bid if the discount rate is 5%?
b. What is the PV of the production royalties if the discount rate is 5%?