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APEC 324: Introduction to Resource Economics Spring 2017 Problem Set #1 Due: 3/14/2017 110 points Name __________________________________________ 1. (20 points) A government is trying to decide how much land to preserve to build a scenic nature trail. There are 1,000 people in the community who would have access to the trail. Each person in the community has an identical inverse demand function given by P=10q , where q is the number of miles preserved and P is the per-mile price that each person is willing to pay for the conserved mile of trail. If the marginal cost of preservation is $500 per mile, how many miles would be preserved in an efficient allocation? 2. (25 points) We can think about net present value (NPV) analysis as a way to standardize monetary values from different points in time. The motivation for NPV is that a dollar today is not worth a dollar tomorrow. As we've discussed, NPV analysis is highly sensitive to discount rates. Consider a household in Delaware that chooses to invest in solar panels. The solar panels cost a one-time amount of $15,000 that must be paid in full in the current year (year 0). We assume that there are no maintenance costs in the future. The benefit of the panels is $800 in the current year and $900 per year for every following year. Calculate the year that the solar panels pay for themselves (i.e., when NPV is positive). Use three different discount rates: 3%, 6%, and 12%. I encourage you to use Excel for your calculation, and then just copy the table that shows the NPV of each year's annual benefit for each discount rate. Please make sure to state any assumptions you make. (Hint: not all investments payoff financially) Are there other benefits or costs that we haven't accounted for in this analysis? If this was your house, would you install the solar panels? Why or why not? 3. (20 points) Explain Hotelling's Rule as if you were explaining it to your friend. Why don't resource values always follow Hotelling's Rule? (Hint: there are two main reasons) 1 4. (25 points) Assume that demand and supply functions for oil are: Qd =2005 P Qs=5 P a) Draw a graph of supply and demand for a single time period. What is the equilibrium price and quantity consumed in this one time period when we ignore future consequences of today's resource use? b) Now solve for consumption for two time periods, taking into consideration the impact of consumption in the first time period on resource availability in the second time period. The discount rate is 4%. Total oil supply is limited to 100 units. Calculate the efficient allocation of resources and show this graphically. c) What is the marginal user cost for this efficient allocation? If this user cost is included in the original supply and demand graph from part (a), what is the new equilibrium? 5. (20 points) Read the following NPR article and listen to the radio news clip about wind power. Identify and briefly discuss at least two linkages between topics that we've discussed in class and this current resource issue. http://www.npr.org/2017/02/16/515376114/the-south-has-been-slow-toharness-its-wind-but-thats-changing 2