$20.00
(a) If oil production starts now, what is the present value of the profit from oil production?
(b) If oil production is delayed and starts in five years’ time instead of now, what is the present value as of now, of the profit from oil production?
(d) If there is no oil production, what is the present value of beach recreation in the area?
(e) If oil production starts now, describe the time profile of the beach recreation that will occur in the area. What is the present value of this recreation?
(f) If oil production is delayed and starts in five years’ time instead of now, describe the time profile of the beach recreation that will occur in the area. What is the present value of this recreation?
(i) Given three policy options – oil production starts now, oil production starts in five years’ time, or no oil production ever – which is the best option from an economic perspective?
What economic return does a person earn if he owns a renewable resource (e.g., a forest) and he lets the resource stay undisturbed for an extra year?
What economic return does a person earn if he owns a Rembrandt painting and he holds on to the painting for an extra year?
Suppose a person owns quantities of all three types of resources – he owns a number of coal deposits, a number of forests, and a number of old master paintings. What economic rule should he follow in balancing his portfolio of assets?
(a) A market equilibrium requires identifying price and quantity at all times. What are the four variables for which we need to find numerical values to find the equilibria?
(b) To find these four unknowns, we need four equations. These equations are (i) the two demand curves, (ii) the Hotelling price path, and (iii) a summing-up condition that says that the quantity used in both periods sums to the stock. Write down these four equations.
(c)Solve the four equations by substitution to find the equilibrium quantity harvested in each period and the equilibrium market price in each price. What is the solution (round your answers to two decimal places).
(d) In this solution, does price rise with the interest rate?
(f) What is the discounted present value of the producer’s profit over the two periods?
(g) What happens to the solution if the interest rate is 10% — how do the answers in part (c) change?
(a) What has happened to the world price of oil since the beginning of this year? Since about 2000? What factors might explain those trends?
(b) How well does the Hotelling Rule explain the trajectory of the price of oil since 2000?
(c) Suppose the Keystone pipeline is built and comes into operation. What do you think would happen to the price of oil in the US? Explain the reason for your answer.
(e) Suppose the Keystone pipeline is not built and Canada does not produce the new, relatively high-CO2 intensity source oil. What do you think would happen to the price of oil in the US? Explain the reason for your answer.
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