May 4

Here's the answer to the question from class about how to verify that exploration is actually used in today's five-minute problem:

Ri = W2Pi - MECi =  (500 - Qi) - $20 = 480 - Qi

Qi =  480 - Ri

Qd = Q0 + Q1 = (480 - R0) + (480 - R1) = 960 - R0 - R1

R1 = R0*(1+r)

Qd = 960 - R0 - R1 = 960 - R0(1 + (1+r)) = 960 - R0*3

Qd = Qs

960 - 3*R0 = 780

R0 = 60; R1 = R0*(1+r) = 2*R0 = 120

P0 = R0 + MECo = 60+20 = 80

P1 = R1 + MEC1 = 120 + 20 = 140

Since P1 is greater than the breakeven price for exploration, $100, exploration will occur.