Posted: July 6th, 2024

Final Exam – Candidate Questions

Final Exam – Candidate QuestionsExam Date & Time: Wednesday, May 4th, from 8:00am to 10:50amPart 1 – You will be required to answer one of the questions that you did NOT answer on themidterm (your choice):1. In western Wyoming, natural gas production produces a significant amount of ozoneemissions. On really cold days in the winter, temperature inversions trap the ozone near theground, and the unusually high levels of ozone in the atmosphere cause significant healthissues for residents.a. Using a simple supply and demand diagram, model this negative externalityassociated with natural gas production. Be sure to show both the competitive andsocially optimal equilibrium prices and output of natural gas.b. Using your diagram, show the increase in economic welfare that would result frommoving from the competitive to the socially optimal equilibrium.c. How might the Wyoming state government construct a policy that would induce thenatural gas companies to produce the socially optimal amount of natural gas?Mathematically demonstrate your answer.2. Give an example of an environmental good for which the contingent valuation method couldbe used to estimate its value.a. Explain in detail how the contingent valuation method would be used to estimate thevalue of the environmental good.b. What sorts of issues can arise? How might they be addressed? Note: You might referto Hanemann (1994) to help answer this part.c. Briefly describe another valuation method that could be used to value the sameenvironmental good, and explain how the alternative method you chose differs fromthe contingent valuation method.3. What is a public good?a. Give an example of a public good.b. What is the key market failure associated with public good provision? What is theresult of this market failure in terms of how much of the public good is provided?Note: A diagram would go a long way in helping show that you understand theanswer to this question, but it must be accompanied by a complete and intuitivedescription of what you have drawn.c. How might a government entity estimate the value of the public good you chose?d. How might they implement a policy to provide the socially optimal amount of yourpublic good?Part 2 – You will be required to answer the following (a calculator will be necessary for basiccalculations):4. The residents of Deer Lick, Nebraska are considering allowing the proposed StoneKey Oil Pipeline tohave right-of-way to build the pipeline within a couple miles of their town. Without the pipeline, theper capita income in Deer Lick is $36,000 per year. Allowing the pipeline to be built so close to theirtown would pay additional royalties to the townspeople of $4,000 per capita per year. However, thereis a risk – experts have determined that there is a 10% chance the pipeline could leak oil into thetown’s groundwater supply, which would cost residents an estimated $20,000 per capita per year incontamination and other environmental costs. [The tiny town’s lawyers have determined that theywould not stand a chance against the pipeline’s high-powered attorneys, so if there was an oil leakthere would be no chance that the town would win a lawsuit for compensation. That is, compensationfor damages would be zero. They would only continue to receive the $4,000 royalty.] Assume youare a resident of Deer Lick:a. If your utility of wealth were given by the function = ln (), calculate your expectedutility from allowing the pipeline to be built. Based on your expected utility, how would youvote? Explain.b. Calculate your certainty equivalent for taking this risk, and the associated risk premium.Intuitively describe what each of these measures.c. How high would the probability that the oil would leak into the groundwater supply have tobe for you to vote against the pipeline? Why?Let’s say that the townspeople voted to approve the pipeline. To make things simpler for parts (d) and(e), now just use for the utility function, denote per capita income plus royalties as anddamages in the event of a leak as (in other words, don’t bother plugging the actual numbers into theexplicit form utility function anymore).d. Suppose the town could collectively invest some amount (dollars per capita per year) toinstall protective underground barriers that would reduce the probability that any leaked oilwould contaminate the groundwater supply – a form of self-protection. If the town hasinvested per capita per year in self-protection, the probability that a leak will contaminatethe groundwater supply is given by the function , where ! < 0. Derive the conditionfor the optimal amount of investment per capita per year in self-protection? Be sure toprovide an intuitive interpretation of the condition you derive.e. Now suppose that in addition to the public investment in self-protection, the town couldprivately invest the amount (dollars per person per year) in some form of self-insurance thatwould reduce damages per capita in the event of a leak. If a leak occurs, and the town investsper person per year in self-insurance, the damages would be given by the function ,where ! < 0. Derive the conditions for the jointly optimal investments in self-protectionand self-insurance? Be sure to provide intuitive interpretations of the conditions you derive.Part 3 – You will be required to answer one of the following questions (chosen at random byme):5. Using a model similar to that found in Hartwick & Oleweiler, Chapter 8, p. 296-271, derive thecondition for the efficient extraction of a depletable resource, and solve for the optimal amountextracted in any two consecutive periods, ! and !!! . Be sure to interpret the condition you derive.Assume the following:a. The initial stock of the resource is ! .b. The discount rate is .c. The final period is .d. The firm is a monopoly, and the inverse market demand curve for the extracted resource is! = − ! .!e. The extraction cost curve is ! = ! ! .!6. Consider a forest economy in which all timber stands are of equal quality and privatelyowned. Assume that the net price of harvested timber, , is constant over time, as is the costof planting a new stand of trees, . Derive and intuitively explain Faustmann’s rule for theoptimal timber rotation for a representative stand of trees, denoted by . How and why doesthe optimal rotation change if a) the discount rate increases, b) the cost of planting increases,and c) the net price of timber increases?

Tags: Ace My Homework: Essay Help, Assignment Help: USA's #1 Online Assignment Writing Service, Do My Assignment for Me Online - Write Academic Papers, Reliable Online Homework Help For You