Homework answers / question archive / Problem set 2: AEC 434 1 [This problem combines exercise 2 from chapter 5 in the textbook with exercise 3 from chapter 7] A country imports 3 billion barrels of crude oil per year and domestically produces another 3 billion barrels of crude oil per year

Problem set 2: AEC 434 1 [This problem combines exercise 2 from chapter 5 in the textbook with exercise 3 from chapter 7] A country imports 3 billion barrels of crude oil per year and domestically produces another 3 billion barrels of crude oil per year

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Problem set 2: AEC 434

1 [This problem combines exercise 2 from chapter 5 in the textbook with exercise 3 from chapter 7] A country imports 3 billion barrels of crude oil per year and domestically produces another 3 billion barrels of crude oil per year. The world price of crude oil is $90 per barrel. Assuming linear demand curves, economists estimate the price elasticity of domestic demand to be 0.1 and the price elasticity of supply to be 0.25.

a. (1 point) Consider the changes in social surplus that would result from imposition of a $30 per barrel import fee on crude oil that would involve annual administrative costs of $250 million. Assume that the oil price would not change as a result of the country imposing the import fee, but that the domestic price will increase by $30 per barrel. Also assume that only producers, consumers, and taxpayers within the country have standing. Determine the quantity consumed, the quantity produced domestically, and the quantity imported after the imposition of the import fee. Then estimate the annual social benefits of the import fee.

b. (0.5 point) Assume prior to the imposition of the import fee, the country annually consumed 900 million short tons of coal, all domestically mined, at a price of $66 per short ton. Qualitatively (i.e., you don’t need to calculate a number), how would the CBA of the import fee change if, after imposition of the import fee, annual consumption of coal rises by 40 million short tons, but the price of coal remains unchanged.

c.[1 point] Suppose that in addition to increasing coal consumption by 40 million short tons, the price of coal were to rise to $69 per short ton. Assuming the demand schedule for coal is completely inelastic, calculate the change in the net benefits from the import fee.

d.[1 point] Suppose that, under the same circumstances as in part b., the market price of coal underestimates its marginal social cost by $7 per short ton because the coal mined in the country has a high sulphur content that produces smog when burned. By how much would social surplus change in this case? In answering this question, assume that the annual consumption of coal rises by 40 million short tons, but the price of coal remains unchanged.

 

2.Assume that a typical unskilled worker in a developing country would be paid 2 dubyas a week if he migrates to the city and finds a job.  However, the unemployment rate for unskilled workers is 40% in the city.

a.[0.50 points] What does the Harris-Todaro model predict the worker’s rural wage is?

b.[1 point] Assume now that the government is considering funding a project in the city that would use substantial numbers of unskilled workers. Using your answer to part (a), suggest a reasonable upper-bound and lower-bound estimate of the market wage rate for unskilled workers that the government might use in conducting a CBA of the proposed project.

c.[1 point] Suppose that the government invested in a program to raise productivity in the agricultural sector, and that this program was successful. What would such a change do to the wage in the rural sector? How might this affect your answer to (b)?

 

 

 

3.Assume a project will result in benefits of $1.2 trillion in 500 years by avoiding an environmental disaster that would otherwise occur at that time.

a.[0.50 points] Compute the present value of these benefits using a time-constant discount rate of 3.5.

b.[0.50 points] Compute the present value of these benefits using the time declining discount rate schedule suggested in this chapter in section 10.5.1.

c.[1 point] In 200 words or less, describe why you prefer either the answer in (a) or the answer in (b).

 

4. Please examine the figure below, extracted from Whittington et al. (2012), which you have read and we have discussed together.

 

 

Your task is to write a description of 400 words or less that accomplishes the following two goals:

- [1.5 points] Describe the contents of the figure in a way that is accessible to someone who does not know the terminology of cost-benefit analysis, but is interested in understanding which of these health interventions might generate the most good for society.

- [0.50 points] Recommend one of more of these policies as superior to the others, justifying this choice by referring to the contents of the figure.  

 

5.Suppose that you are considering the installation of higher levees in New Orleans that will protect from a sea level rise of 3 feet as opposite to a sea level rise of 1 foot.  The table below gives a similar set of outcomes as in Table 12.1 in the text – these refer to the net income obtained by an individual with a property within the range of being affected by the levee.

 

 

Calculate expected income with and without new levees, expected surplus from new levees, and the option price of the new levees with a utility function of the form u =ln(c).