hm help 1.6

Type your solutions in blue type below the problems you are answering. Note that the assignment has 2 pages. When you have completed the assignment, attach it as a word file (not as a PDF, pic, Pages, or in any other form) and return it to me at the address posted above. I won’t accept late assignments sent to other addresses after the fact.

A few reminders: answer carefully – make sure your answers are clear and concise. Answer only the problem that has been posed - do not add extraneous information. Remember to explain your answer, using the correct terminology.

Part I. Answer problem # 1 (35 points)

1. Consider a single firm that extracts and sells crude oil from its large, privately owned deposit of known size. The firm makes decisions over 2 periods: the current period (t1) and the future period (t2). The annual discount rate is 4%.

1a. Currently, the firm plans to divide production evenly (extracting & selling half of the deposit in each period) over periods t1 and t2. i. Would such a pattern of production be efficient for the firm? (answer yes or no, and explain your answer). ii. If your answer in i. is no, what pattern of production would be efficient? Note that problem 1a has parts I and ii.

1b. Given that the firm produces efficiently, how, if at all, would you expect the firm’s output and price to change from t1 to t2?

1c. Suppose now that the crude oil deposit becomes an open-access resource, and that other firms join the firm mentioned in parts 1a and 1b in the extracting crude oil from the deposit. How, if at all, do the costs identified in part 1.a.ii change?

Part II. Answer either problem 2 or 3. (35 points).

2. Suppose that the state environmental agency contemplates a regulation that would reduce contaminants in Florida's drinking water, and conducts a study of the costs and benefits of three potential regulatory scenarios. Option A is the most stringent (has the strictest requirements) of the scenarios, option B is less stringent, and option C is the least stringent. The study produces the following results (in millions of dollars):

A B C

Total Benefits $34,450 $31,875 $12,150

Total Costs $ 3,150 $ 2,100 $1,850

Marginal Benefits $ 2,600 $19,700 $12,150

Marginal Costs $ 1,050 $ 250 $ 1,850

2a. How would you use the data provided by the study to determine the most efficient regulatory scenario?

2b. Which regulatory scenario would you choose, and why?

3. A fishery is open to anyone who wants to fish in it. The table below provides the number of vessels currently using the fishery, total catch, and marginal private and social benefit data:

Total Catch

Number of Vessels (lbs.) MPB MSB

1 90 90 90

2 160 80 70

3 210 70 50

4 240 60 30

5 250 50 10

6 240 40 -10

7 220 20 -20

The vessel owners receive $1 per pound, and the marginal cost of a vessel entering the fishery is $40.

3a. How many vessels are likely to enter the open fishery? Give the number of vessels, and explain your answer. Does this represent an efficient use of the fishery? Answer yes or no, and explain your answer.

3b. If your answer in a. is ‘no,’ identify the number of vessels that would be consistent with an efficient outcome, and explain why it is efficient.

Part II. Describe 2 of the following four statements as true or false, and give a short explanation of your answer (15 points each).

1. Many analyses of the late 1960s and early-mid 1970’s that predicted imminent resource depletion failed to adequately account for the role of market prices and technological change.

2. Managing an industrial forest by economically efficient, rather than by biologically efficient, rotation, calls for maximization of mean annual increment of the forest.

3. Interstate 4 in Orlando at rush hour is an excellent example of a public good.

4. Suppose you work at point a, go to school at point b, and frequently meet friends at point c. You get to each of these places by traveling across an area that is soon to be regulated as an endangered species protection area, so that you will no longer be able to traverse the area to get to work, school, or to visit friends. The proposed regulation does not require you, or anyone else, to make any explicit expenditures to circumvent the designated area. Therefore, there are no regulatory costs associated with this rule.