Assignment:
Question 1
The following data show the possibilities for the harvesting of a forest:
|
# of loggers
|
Total Harvest
|
Total
Cost
|
Total
Revenue
|
Marginal
Cost
|
Marginal
Revenue
|
Profit
|
Average
Value
|
|
0
|
0
|
0
|
|
|
|
|
|
|
1
|
100
|
$125
|
|
|
|
|
|
|
2
|
250
|
250
|
|
|
|
|
|
|
3
|
450
|
375
|
|
|
|
|
|
|
4
|
650
|
500
|
|
|
|
|
|
|
5
|
800
|
625
|
|
|
|
|
|
|
6
|
900
|
750
|
|
|
|
|
|
|
7
|
950
|
875
|
|
|
|
|
|
|
8
|
1000
|
1000
|
|
|
|
|
|
|
9
|
1000
|
1125
|
|
|
|
|
|
|
10
|
950
|
1250
|
|
|
|
|
|
Each board-foot of wood sells for $1.
a) If this forest is owned by a single person, what will be the level of harvest? Justify your answer.
b) If the forest is open-access, what will be the level of harvest? Justify your answer.
c) Imagine if the government wanted to manage this forest (following the efficiencystandard), and it is open access. What policy would you recommend, and why?
Question 2
Suppose that 100 people live around a hazardous waste dump. If the people continue to live there for 20 years, one of them will likely contract a painful, non-fatal cancer, that will lead to $1 million in health care costs, foregone wages, and pain and suffering. Assume this is all the damage this waste will ever do (the waste loses its toxicity after 20 years).
The Environmental Protection Agency has three choices:
a. Do nothing.
b. Clean up at a cost of $4 million
c. Relocate the families at a cost to taxpayers of $1 million; fence off the property for 20 years.
i. Rank the solutions in terms of efficiency. Explain your reasoning.
ii. Rank the solutions in terms of safety. Explain your reasoning.
Question 3:
The stream of costs and benefits (in millions) is estimated for a proposed city baseball stadium. Year 0 represents the initial investment while costs for years 1-5 are the maintenance costsincurred at the end of each year. The benefits are the revenues from sport team contractsand revenues at the end of each year. Fill the table by calculating Present Discounted Value (PDV) of the net benefits for two different discount rates (r=10% and r=3%). Does the project pass the cost-benefit test when the discount rate is 10 percent? What about 3 percent?
|
|
|
|
|
Discount rate=10%
|
Discount rate=3%
|
|
Year
|
Costs
|
Benefits
|
Net Benefits
|
PDV of net benefits
|
PDV of net benefits
|
|
0
|
$40m
|
0
|
|
|
|
|
1
|
1
|
3
|
|
|
|
|
2
|
1
|
10
|
|
|
|
|
3
|
1.5
|
12.5
|
|
|
|
|
4
|
2
|
15
|
|
|
|
|
5
|
3
|
15
|
|
|
|