Question 1: Private Discounting
You are considering installing all new compact fluorescent light bulbs in your house. Your initial investment in the light bulbs will cost a total of $400 and you expect them to last 4 years. Atthe end of each of the four years, you will have saved $125 in electricity costs (assume thatyou pay your electricity bill only one time per year, at the end of the year). If you don't installthe bulbs, you would invest your money and expect to earn 5% per year. Show all your work forthe following questions.
a. Calculate the future value of the next best alternative (e.g. investing the money at 5%)
b. Should you buy and install the light bulbs? Why or why not?
Question 2: Travel Cost Model
Suppose the town of Bandon on the Oregon Coast is applying for a permit to build an oceanoutfall. Ocean outfalls pipe partially treated sewage out to the ocean several miles where it isdischarged to be carried away by the currents. It is estimated that storms may occasionallyresult in shifts in ocean currents that transport the sewage back to the beach, prompting beachclosures for days after the storm passes. When this occurs, the beaches will be closed for use &no one is allowed to even walk on the beach. The Oregon Parks and Recreation Department(OPRD) hires you to estimate of the cost of closing beaches in Bandon for a day. You decide todo a travel-cost study to estimate this potential change in environmental quality.
a) Describe what information you would need to collect to do the study.
b) Graphically show how you would measure the cost of closing the beach.