SOS 325

SOS 325
Spring 2016

Answer all questions on this sheet of paper and turn it in in class on Thursday March 3rd or submit it electronically via Blackboard by 4:30 p.m. on the same day.

Multiple Choice

1. Stated preference methods are only useful for finding non-use values for changes in environmental variables.
2. There are two demand curves for a private (i.e. normal consumption) good: P=30-q1 & P=30-3q2. Let Q=q1+q2 be the total quantity demanded on the market. The equation for the total (market) demand is
3. The present value of $10,000 in 5 years with a discount rate of .05 is
4. Which of the following factors is likely to increase the price elasticity of demand for gasoline for automobile drivers?

5. If a project has a positive net present value at a discount rate of 7% it will also have a positive net present value at a discount rate of 3%.
6. The marginal benefit for the use of a highly toxic heavy metal in a production process (the producer’s willingness to pay for its use) is 1000-50*Q. The marginal damage (cost) from the use of the refrigerant on the environment is 1250+5*Q. The efficient amount of refrigerant is (note, graphing this can help)
7. The demand curve for fair-trade coffee (Q is in pounds) is P=30-.01*Q. The current price/lb. is $10. A 1% increase in the price of fair-trade coffee will be met by what percentage decrease in quantity demanded?
8. A thorough social benefit cost analysis for a new hydropower dam reveals that the net present value of the project is positive at all reasonable discount rates. Is the project necessarily the most economically efficient way to invest the resources?
9. Efficient allocation of a resource requires that the happiness from a little bit more of the resource be equalized between different users.
10. A travel cost study is conducted for Grand Canyon National Park. Which of the following are NOT possible to examine using such a study (choose all that apply)?

Long form questions (80 points)

11. (30 pts.) Consider the market for electricity in the city of Phoenix. Suppose demand (in megawatt hours) is given by Price = 100 – 15*Number of megawatt-hours + 50*RenewableShare. RenewableShare is a variable between 0 and 1 and is the share of power generation that comes from renewable sources (e.g., wind, solar).

a. (5 pts.) How does the quantity of renewable sources affect consumers’ willingness to pay (marginal benefit) for an additional unit of electricity?
b. (5 pts.) Suppose the share of renewable sources is .1. Draw the demand curve below, being sure to label the axes and the slope and intercept appropriately.
c. (10 pts.) Suppose the price of electricity is fixed at $25/megawatt-hour. What is the total net benefit to consumers from electricity generation (the “consumer surplus”)? In answering this question, assume that the share of renewable sources remains as in part b.

d. (10 pts.) Now assume that due to a recent government mandate on the amount of renewables in the generation mix, the share of renewables increases to .2. Assuming the price of unit electricity from c) remains the same, what is the new consumer surplus? What is the economic benefit to electricity consumers (net of costs) from this increase in renewable sources? What is the impact to revenues from this change?

12. (15 points) You are considering an investment in home energy conservation that has a lifetime of 5 years. It will cost you $160 to install and will reap benefits in terms of energy saved of $20 in year 1, $30 in year 2, $40 in year 3, $50 in year 4, and $60 in year 5. Assume your discount rate is 5%.

a. (2 points) Calculate the discount factor associated with your discount rate.

b. (8 points) What is the net present value of the energy savings? Is the insulation a good investment for you?

c. (5 points) Would the insulation be a good investment if your discount rate were 8% over 5 years?

13. (10 points) You are the mayor of the small town of Wasilla, Alaska. A landowner has offered to lease the town 1,000 hectares of wilderness for 50 years for a payment of $2,000,000 (paid upfront) in order to create a wilderness preserve. You are very tempted because of the wildlife which live there (such as moose) as well as the recreational value to your constituents. You look at the Financial Times and see that if you borrow money for this project, the interest rate will be 5% per annum, and so you conclude the discount rate you should use is 5%. Your Parks department estimates that annual recreational and non-use benefits will be $100,000 per year (starting from the moment the land is purchased).

a. (5 points) What is the maximum amount you would be willing to pay the landowner to lease the land for 50 years? In other words, what upfront payment for the land just breaks even from a benefit-cost perspective?

b. (5 points) How would your answer to (a) change if the recreational and environmental benefits increased by 3% per year, reflecting the fact that Wasilla is growing, not only in population but also in the income of the population?
14. (10 points) Suppose the demand curve for scuba diving in a marine preserve is:

Q = 250 – 1.5*P – 2*Pz

Where Q = number of dives demanded in a day; P = price per dive; and Pz is the price of wet suit rental.

a. (5 points) How does the rental price of wet suits influence demand for scuba diving trips? Explain why.

b. (5 points) If Pz = $10, what is the own-price elasticity at P = $30? Is the demand price elastic or price inelastic?
15. (15 points.) Assume there are two polluting firms A and B with the following marginal benefit curves (demand) curves for their emissions:

P = 80 – 2QA and
P = 60 – 3QB.

where QA and QB are 1000s of tons of emissions for firm A and B respectively.
a. (5 pts.) Find the market (aggregate) demand curve for abatement. Graph all the individual and market demand curves.
b. (10 pts.) A residential community located close to these firms suffers damages due to the pollution. The marginal cost curve of this community is given by P = 40 + 2Q. Find the efficient level of emissions.

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