Thursday, December 1, 2011

8.2 - Optimization and discounting

Change the model to take into account the growing future demand and therefore a higher future price for the resource. Introduce another parameter which will describe the growing demand for the resource. Make the price a function of both demand and supply. How does this change the results of optimization? Does the discounting still play an important role?

I assumed demand growth independent of supply or price according to the equation

demand = .5*exp(0.15*TIME)

I incorporated demand into price by changing the price function to

price = a*demand/(1 + mining) + b

The major effect on optimization was to increase the value of d from 2.36 to 3.01, which represents more rapid changes in rate of mining.

Discounting plays a more important role than without the growth in demand. The following table summarizes the effects of demand growth and discounting.

Total profits
Discount rate: 0% 5%
No demand function $105k $66k
Growing demand $699k $68k

Exhaustion of resource. Time to exhaustion or, if no exhaustion, resource remaining after 50 years
Discount rate: 0% 5%
No demand function after 50y, 2.7 remain 20.7y
Growing demand after 50y, 80 remain 20.2y

Discounting clearly drives much faster extraction of the resource, and, at least as I formulated the demand function, growing demand has little consequence in a 5% discount rate world -- the urgency of getting the resource to market to be able to take advantage of the discount rate seems to dominate the system.

No comments:

Post a Comment