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Homework answers / question archive / AEC 351 Quiz 1 1) (10 points) Drawing on your recollection of the Loomis and Haefele (2017) reading, fill in the blanks in the following key paragraph from that paper: Much of the controversy over hydraulic fracturing is not about whether there are net benefits to society, but rather how the benefits and costs are —(i)—
AEC 351 Quiz 1
1) (10 points) Drawing on your recollection of the Loomis and Haefele (2017) reading, fill in the blanks in the following key paragraph from that paper:
Much of the controversy over hydraulic fracturing is not about whether there are net benefits to society, but rather how the benefits and costs are —(i)— . Given the perceived costs to those adversely affected by hydraulic fracturing, it is not —(ii)— that they would seek bans, especially in suburban areas where jobs in occupations unrelated to oil and gas are plentiful and pay reasonably well. For those suburban residents living near hydraulically fractured wells the costs may outweigh the —(iii)— [...].
(circle only one response)
2.
(10 points) Suppose a competitive market for agricultural production of soybeans has 50 identical firms, each with marginal cost given by MC(qi) = 7+ .005qi, with MC in dollars per package of paper and q in thousands of packages. Which of the following functions describes inverse supply (PS(Q)) for this market?
(circle only one response)
(E) None of the above
3.
(15 points) [True, False, or Uncertain?] Given an annual discount rate r and a sequence of non-zero costs over N +1 years, C0,C1,...CN, from the perspective of the current year (year 0) the net present value of these costs is:
. Assume each cost Ci is incurred (i.e., it must be paid) at the beginning of the corresponding year i. (circle one answer)
[Hint: you may also assume there are N+1 elements of the sequence C0,C1,...CN]
(A) |
True |
(B) |
False |
(C) |
Uncertain |
4.
(15 points) In nonrenewable resource markets characterized by a dominant producer and multiple smaller producers that may be usefully grouped in a “fringe” sector, economic theory predicts that the dominant producer may be able to exploit its market power by behaving strategically.
How, specifically, might the dominant producer strategically plan its output choices to its advantage (i.e., to maximize its producer surplus)? Explain using complete sentences and, optionally, one or more economic graphs.
5.
(25 points) The market for 10 mm refined cobalt (Co) cubes is perfectly competitive. Market inverse demand is given by PD(Q) = 650−2Q, where price is measured in dollars per cube and Q is measured in thousands of cubes. Market inverse supply is given by PS(Q) = 150+2Q, where price is measured in dollars per cube and Q is measured in thousands of cubes.
[Note: in this problem consider a static market equilibrium only]
your solution using a graph.
6.
(15 points) Consider a market structure where there is only one producer of steel. This firm acts as a profit-maximizing monopolist. Assume that the monopolist’s marginal cost curve is MC(Q) = 60+ .25Q, where Q is measured in thousands of pounds. Market inverse demand for steel is given by PD(Q) = 120−.875Q, where price is given in terms of dollars per pound of steel and Q. The monopolist’s marginal revenue is MR(Q) = 120−1.75Q, where again Q is in terms of thousands of pounds.
What is the equilibrium quantity of steel sold by the monopolist, and what is the price per pound?
7.
(10 points) A firm is considering purchasing a iron mine. The most profitable strategy for the mine owner would be to extract all of the iron at once three years from now, yielding profits of $15 million with certainty. The price of the mine is $12 million. Assume that the annual discount rate is 7%. Based on this information, should the firm purchase the cobalt mine? (circle only one response)
Extra Credit
Consider the problem of a mining firm over two periods (0 and 1). The firm has access to X = 20 units of a nonrenewable resource and must set extraction levels in each period (q0 and q1, respectively). Price over the two periods is fixed at P = 30. The firm’s marginal cost of extraction is MC(qt) = 22+ qt.
a.) What is the rent maximizing extraction plan assuming it applies a 10 %
discount rate (r = 0.1).
b.) Suppose that a new policy limits the use of the nonrenewable resource, such that the firm only has access to X = 10 units. What is the rent maximizing extraction plan assuming it applies a 10% discount rate (r = 0.1). What are the total resource rents the firm earns under the efficient policy in periods 0 and 1 ? Total resource rents in this problem are the same as the (total) profit the firm earns from mining.
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