Environmental and Natural Resource Economics

Economics 330

Environmental and Natural Resource Economics

Sample Exam I

Professor Reiman

1.  Gordon’s model of open access resource exploitation highlights the lack of incentives to preserve a renewable resource under open access conditions. Design a policy that an open access resource manager might use to encourage the optimal level of fishing effort. Explain and show your policy in a diagram.

2.  Resource economists have long been concerned with measures of resource scarcity. Compare in detail the physical measure of resource scarcity as employed in the Neo-Malthusian Limits to Growth study with the neoclassical economic measures discussed in class. Be sure to include a discussion of the economic factors that mitigate natural resource scarcity.

3.  You are given the following data for an exhaustible resource:

Initial consumption (C0) = 1000 tons per year

Demand growth rate (k) = .05

Known stock (S) = 20,000 tons

Calculate the time to exhaustion (TE) of this resource. What is the meaning of this time to exhaustion?

4.  Draw the isoquant maps associated with each of the following cases:

a.  Capital (K) and energy (E) are used in fixed proportions in production. Show how a firm will adjust when energy resources are becoming increasingly scarce.

b.  Capital (K) and energy (E) are substitutes in production. Show how a firm will adjust when energy resources are becoming increasingly scarce.

c.  Write down the formula for the Allen-Uzawa elasticitiy of substitution between capital and energy and use your diagram from part (b) to demonstrate the following elements of the formula (where “D” means “change in”):

(i) D(K/E) (ii) D(PE/PK)

Be sure to describe all of the components of your diagrams and label the axes accurately.

5.  In the space provided below, show the appropriate change in consumer surplus measure for an increase in the price of all other goods. Be sure to show the following: compensating variation, Hicksian income-compensated demand, Marshallian ordinary demand, substitution effect, and income effect.

All other goods

Gas

Price of gas

Gas

6.  Suppose you have the following (admittedly simplified) estimates for the costs and benefits of a dam:

Calculate the net present value of this stream of costs and benefits…

a.  …when the discount rate is r = .05.

b.  …when the discount rate is r = .10.

7.  The diagram below shows Field’s analysis of the optimal number of commons (m). Suppose the population engages in herding activities.

a.  Label and explain the meaning of each curve and axis.

b.  Show the effects of an infectious disease that decreases the population, increasing the scarcity of labor. How does the optimal number of commons (m*) adjust? [Hint: How will the wage (w) and number of farmers per commons (n) change?]

c.  Show the effects of an increase in the price of the resource. How does the optimal number of commons (m*) adjust?

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Number of commons (m)

1 N

8.  The diagram below depicts the input choice of commoners in a grazing commons.

a.  Label and explain each curve.

b.  Show the optimal input response of commoners to an increase in the price of the output (p) of the commons.

c.  Show the optimal input response of commoners to an decrease in complementary social institutions in the commons.

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9.  The diagram below is used to demonstrate the tradeoff and sustainability paradigms. a. Label and explain the meaning of each curve and important intersection.

b.  Trace the path of the economy implied by the sustainability paradigm.

c.  Show the path of the economy implied by the tradeoff paradigm.