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Homework #5 Due Monday Homework #6 Due Oct. 22 Extra Credit Writing Assignment Oct. 17th Writing Assignment Due Oct. 24th

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Suppose a market demand schedule for a resource is P = 200 - 4Q and the market supply schedule is P = 80 + 2Q. What is the equation for the marginal net benefit curve? Disregarding future time periods, how much of the resource would be produced? What is the marginal net benefit at this level of production?

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What is Hotelling’s rule?

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In your own words, explain why they claim “the fate of the world depends on the discount rate”.

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What types of materials were collected at the Household Hazardous Waste Collection Drive? Why can these types of materials NOT go in landfills? What was the cost for this one-day event, and how much material was collected? Suppose the EAC did not collect Hazardous Waste, how much would a private company have to charge per ton to collect the waste?

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A higher discount rate will favor the present. The amount allocated to the second period falls as the discount rate rises.

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Assumptions Fixed supply of oil Consider two time periods only Total supply is 20 tons Demand (marginal WTP) is constant:

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Assume the demand conditions are the same, but let the discounted rate be 0.05 and the marginal cost of extraction be $2. Total supply available = 20. How much would be produced in each period in an efficient allocation? Assume the discount rate is 0.1. What happens to the efficient allocation? Assume the discount rate is 0.2. What happens to the efficient allocation?

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Marginal user cost rises over time at the rate of discount causing efficient prices to rise over time and thus reflecting scarcity.

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The opportunity cost caused by intertemporal scarcity is called the marginal user cost (MUC). The marginal user cost for each period in an efficient market is the difference between the price and the marginal extraction cost.

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Scarcity rent is producer surplus that exists in the long run due to fixed supply or increasing costs

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Assume the demand conditions are the same, but let the discounted rate be 0 and the marginal cost of extraction be $4. Total supply available = 20. How much would be produced in each period in an efficient allocation? What would be the marginal user cost in each period? Would the static and dynamic efficiency criteria yield the same answers for this problem? Why?

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Assume the demand conditions are the same, but let the discounted rate be 0.1 and the marginal cost of extraction be $4. Total supply available = 10. How much would be produced in each period in an efficient allocation? What would be the marginal user cost in each period? Would the static and dynamic efficiency criteria yield the same answers for this problem? Why?

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The Two-Period Model Revisited Dynamic efficiency is the primary criterion when allocating resources over time. An n-period model presented uses the same numerical example as before, but extends the time horizon and increases the recoverable supply from 20 to 40, and a Marginal Cost of $2, and r=.10.

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Homework #5 Due Monday Homework #6 Due Oct. 22 Extra Credit Writing Assignment Oct. 17th Writing Assignment Due Oct. 24th

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Slide 1Copyright © 2004 McGraw-Hill Ryerson Limited Chapter 2 Supply and Demand.

Slide 1Copyright © 2004 McGraw-Hill Ryerson Limited Chapter 2 Supply and Demand.

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