Exhaustibility and the durable-goods monopolist (Q1108177)

A dynamic profit-maximization model of a monopolist is considered where there are two periods and the monopolist's output is an exhaustible durable good such as gold or diamond. It is shown that the condition of exhaustibility when combined with the profit maximization objective leads the monopolist to a certain degree of precommitment in his production plan. Four different cases are presented to show when it is optimal to produce according to a dynamically consistent feasible production plan, when two periods are involved and the monopolist has to optimize against the residual demand in the second period.