1. Suppose there is no regulation for the use of cell phone in class, so everybody is allowed to talk with their cell phone in class. Each call takes one minute and the battery life only allows for a maximum 10 minutes call. If Joe is asked not to disturb the class, he would require compensation based on his marginal cost of reducing the number of calls, which is MC = 0.5X, where X is the number of call minutes reduced (the first minute he cuts costs him 50 cents, the second unit $1, and so on).
a. Everybody in your class is like Joe; they want to use their cell phone as much as they can. What is the marginal cost of reducing number of calls for your class of 50 students? Draw the MC curve for your class.
b. Suppose you do not want to be disturbed by phone calls in class and are willing to pay $5 for the first minute call reduced, $4.5 for the second minute reduced, and so on. Drive the formula for your marginal benefit and draw the MB curve.
c. If the marginal benefits of all class members are the same, what is the class marginal benefit?
d. If you want to negotiate individually with your class to reduce the noise, what would be the outcome (how many minutes will be reduced and how much you will end up paying?)
e. If all class members decide to negotiate with the callers, what would be the outcome (how many minutes will be reduced and how much will be paid?)
f. How are the outcomes of individual and class negotiations (c and e) different? Which one will lead to more class noise?
g. Is this allocation mechanism of the cell phone use in class efficient? Explain.
h. Are the individual and class outcomes in c and e achievable? Explain.
i. What are the potential problems with market allocation for noise pollution in class? Are there any better solutions to this problem? Explain.
2. The Onceler has clear-cut a forest of Truffula trees, and is considering replanting. If he replants, he will have another stand of trees to harvest, earning an (inflation adjusted) resource rent of $10 million in 40 years. Replanting costs $1 million each year for three years. The Onceler's opportunity cost of capital is a mutual fund investment, paying 6%.
a. Fill in the chart below to determine if replanting is profitable.
|
Year
|
Cost
|
Benefit
|
Discounted Cost (Present Value)
|
Discounted Benefit (Present Value)
|
|
0
|
$1 m
|
|
|
|
|
1
|
$1 m
|
|
|
|
|
2
|
$1 m
|
|
|
|
|
40
|
|
$10 m
|
|
|
|
TOTAL
|
|
|
|
|
b.redo (a) if the discount rate is 1% (use the table below).
c. If the Oncelerdoes not clear-cut but replants, then the Brown Barbaloots, Swamee Swans and Humming Fish will come back, attracted by the habitat. Beginning in 40 years, their populations will recover sufficiently to generate a flow of benefits (people enjoy recreating among these creatures) equal to $1 m per year forever. Assume the Department of Sustainability uses a 1% discount rate to evaluate replanting today. Fill in the chart below to choose the most sustainable option among the following three cases:
i. clear-cut and replant
ii. do not clear-cut and replant
iii. do not replant
|
Year
|
Replant Cost
|
Replant Benefit
Harvest
|
Replant
Benefit
Recreation
|
Discounted Cost
(Present Value)
|
Discounted Benefit
Harvest
(Present Value)
|
Discounted Benefit Recreation
(Present Value)
|
|
0
|
$1 m
|
|
|
|
|
|
|
1
|
$1 m
|
|
|
|
|
|
|
2
|
$1 m
|
|
|
|
|
|
|
40
|
|
$10 m
|
$1 m
|
|
|
|
|
41
|
|
|
$1 m
|
|
|
|
|
42
|
|
|
$1 m
|
|
|
|
|
43
|
|
|
$1 m
|
|
|
|
|
44
|
|
|
$1 m
|
|
|
|
|
45
|
|
|
$1 m
|
|
|
|
|
46
|
|
|
$1 m
|
|
|
|
|
47
|
|
|
$1 m
|
|
|
|
|
48
|
|
|
$1 m
|
|
|
|
|
...
|
|
|
|
|
|
|
|
TOTAL
|
|
|
|
|
|
|
c. Suppose in the example above that the benefits of clear-cutting and not replanting outweighed the costs. What would have to be true for that decision to be economically sustainable?