1:38 . LTE 1. (12 marks) To answer the following, please refer to Question #1 in-class portion of Lab 3. a. (6 marks) If the fixed supply of water is 20 units, what is the efficient allocation for person A? What is the efficient allocation for person B? Explain. b. (6 marks) If the fixed supply of water is 4 units, what is the efficient allocation for person A? What is the efficient allocation for person B? Explain. 2. (30 marks) A forestry firm hired you, an economist, to consult on the optimal harvest age for a stand of trees. The forester has the secure private property rights to the stand, so rights are enforceable, exclusive, and transferable. He plans to harvest only once (i.e., this is a single harvest scenario). a. (18 marks) The forester needs to determine when to harvest the trees. You are provided with the following information: Age of Stand 30 50 Volume harvested (m3) 15,000 18,000 Timber price at time of the harvest ($/m3) 2 2 Harvesting cost ($/m3) 0.4 0.4 Planting cost ($) 1,000 1,000 Discount rate 0.03 0.03 Calculate the present value of net benefits for each harvest age and state which one would you recommend. b. (4 marks) Does it affect the recommended harvest age if the planting cost is reduced to $700? Explain. c. (8 marks) How the optimal harvest age changes if the discount rate decreases? If it increases? Explain your reasoning. 3. (28 marks) A depletable groundwater resource needs to be allocated between Period 1 and Period 2. In total, there are 10 units of water available for both periods. The demand for groundwater is constant and can be represented by the following demand function: Q = 7.5 - 0.5P. The marginal cost of extracting groundwater is also constant at $3/unit, and the discount rate is 3%. [Note: marginal extraction cost always increases for a depletable groundwater resource in reality; but for the sake of simplicity, it is constant here]. a. (22 marks) How many units of groundwater in each period is consumed in an efficient allocation? To decide whether to apply a dynamic efficiency criterion, first test if there is a scarcity at 10 units. b. (2 marks) What is the marginal user cost? c. (4 marks) Find the optimal prices (P*) for each period in an efficient allocation. courselink.uoguelph.ca