economics 5250/6250 dr. lozada fall 2014 final examlozada/environ_resource... · 2016. 11. 1. ·...

Economics 5250/6250 Dr. LozadaFall 2014 Final Exam

This exam has 67 points. There are seven questions on theexam; you should work all of them. Each question 9 pointseach, except the first two questions, which are worth 11 pointseach.

Put your answers to the exam in a blue book or on blanksheets of paper.

Answer the questions using as much precision and detailas the time allows. Correct answers which are unsupportedby explanations will not be awarded points. Therefore, evenif you think something is “obvious,” do not omit it. If youomit anything, you will not get credit for it. You get credit fornothing which does not explicitly appear in your answer. If youhave questions about the adequacy of an explanation of yoursduring the exam, ask me.

Answer all of the following questions.

1. [11 points] In class we derived the following equation:

(1 + δ )MΠ7 = [1 + F ′8] MΠ8 +∂Π8

∂X8.

(a) What does this equation simplify to in the steady state?(b) Give an intuitive explanation of “∂5/∂X = 0.”(c) Give an intuitive explanation of the equation you derived in

part (a) if ∂5/∂X = 0. (You need not repeat what you saidin part (b).)

2. [9 points] Contrast the Hotelling-Rule price path for a given ex-haustible resource if the interest rate is:

(a) high;(b) low.

Explain your answer.

3. [9 points] According to “Hartwick’s Rule” (not to be confusedwith “Hotelling’s Rule”), development is sustainable if the total cap-ital stock is kept constant.

(a) What does this mean, given the importance of exhaustible re-sources?

(b) Why do some people (not everyone!) argue that this is not auseful idea?

4. [9 points] This problem concerns the market for tradeable pollu-tion permits.Draw a graph with “permit price” on the vertical axis and “permitquantity” on the horizontal axis.

(a) What does this graph’s supply curve look like? Why does itlook this way?

(b) What does this graph’s demand curve look like? Why does itlook this way? Be thorough in your explanation.

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5. [9 points] Your book quotes a government commission as definingthe “Best Practicable Environmental Option” (“BPEO”) as

. . . the outcome of a systematic consultative and decision-making procedure which emphasizes the protection andconservation of the environment across land, air and wa-ter. The BPEO procedure establishes, for a given set of ob-jectives, the option that provides the most benefit or leastdamage to the environment as a whole, at acceptable cost,in the long term as well as in the short term.

Discuss this.

6. [11 points]

(a) What is the present value of “−$10 today and +$12 in one year”if the discount rate is δ?

(b) Why might the firm be interested in knowing the answer topart (a)?

(c) Suppose a firm is trying to evaluate the prospect of “−$10 todayand an uncertain amount in one year, with the expected payoffin one year being +$12” if the discount rate is δ . How might thefirm do this by changing part (a)’s calculations? (Suppose thefirm is risk-averse.)

7. [9 points]

(a) Construct a consequentialist (“teleological”) argument in favorof the following proposition: “we should adopt no policies toalleviate global climate change.” Explain why this argument isconsequentialist (“teleological”).

(b) Construct a non-consequentialist (“deontological”) argument infavor of the following proposition: “we should adopt no policiesto alleviate global climate change.” Explain why the argumentis non-consequentialist (“deontological”).

(This question requires you to be creative because we did not answerit in class.)

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