Quiz 2, Economics 423, Fall 2008 (Prof. Hackett)
Name: Answer Key (1 point). Select ONE question you do NOT want to
answer and cross it out with a big X. Provide the very best answer to each of
the remaining 11 questions below. All questions are equally weighted and worth
9 points apiece.
Part I: All students
1. True or false (circle one): Reputation is likely to
produce effective self-enforcement when consumers are poorly informed of a
firm’s environmental performance, when there are no quality alternatives, and
when it is costly and difficult to organize consumer action (such as a
boycott).
2. True or false (circle one): Fishery management based on a
total allowable catch and individual fishing quotas is more likely to induce
a race for fish, or derby, than management based on a total allowable catch and
a limited season opening.
3. True or false (circle one): The contingent valuation
method utilizes a revealed preference methodology in which expenditures linked
to visiting a recreational site are used to estimate the economic value of the
site.
4. True or false (circle one): In the comparative cost
analysis done by the California Energy Commission regarding removal of the
Klamath River dams, across most scenarios the analysis found that it would be
cheaper to keep the dams and to build fish ladders and other mitigations than
to remove the dams.
5. True or false (circle one): The hedonic regression method
utilizes a stated preference methodology in which a survey respondent reports
whether or not they are willing to pay a fixed dollar amount for some
environmental or natural resource improvement.
6. True
or false (circle one): The supply of a particular piece of legislation derives
from the opportunity cost of legislators’ time, the legislators’ personal
preferences, and how support for the legislation affects legislators’ prospects
for re-election.
7. True or false (circle one): If a job is similar to many
others but (i) involves an annual risk of premature
death on the job that is 0.0005 (5 per 10,000) higher, and (ii) pays a wage
premium of $2000 per year, then based on this data, the value of a statistical
life is $10 million.
8. True
or false (circle one): A winner-takes-all simple majority or plurality voting
system tends to promote two-party politics in which the side that best forms an
effective internal coalition wins the election.
9. True or false (circle one): Economically valuable
ecosystem services, such as air and water purification, decomposition of
wastes, and renewal of soil fertility, are not subject to scarcity, have no
opportunity cost, and thus cannot be valued using economic methods.
Part II: ONLY For students in
the 4th unit lab:
Suppose that there are 1000
units of a nonrenewable resource available over two periods (0 and 1). Demand
in each period is given by P = 2000 - Q. Marginal cost is a constant 200 in
both periods. The discount rate is 10 percent.
10. What is the dynamically
efficient allocation of the 1000 units of the nonrenewable resource, and what
will be the prices in the two periods? Please show your work.
Q0 = 561.90 P0
= $1438.10
Q1 = 438.10 P1
= $1561.90
11. Suppose that the basic
setup of the problem above were the same, except that now the discount rate
rises to 20 percent. Re-compute the dynamically efficient allocation of the
1000 units of the nonrenewable resource. Please show your work.
Q0 = 618.18 P0
= $1381.82
Q1 = 381.82 P1
= $1618.18
12. Correctly draw the price
paths for questions 1 and 2 above in a single fully-labeled diagram. Provide a
brief economic explanation for why the two price paths have different slopes.
Plot price (y
axis) against time (x axis) and show how (for question 10) price rises from
period 0 to period 1 from 1438 to nearly 1562. Show how (for question 11) price
rises from period 0 to period 1 from 1382 to 1618.
Note that the
price path is steeper (i.e., prices rise faster over time from now to period 1)
in question 11 than in question 10, due to the higher discount rate. This is
because with a higher discount rate people assign a higher value to gains today
versus gains in the future.
Part III. ONLY For students
who are NOT in the 4th unit lab.
. 
Suppose there are eight
fishers working a fishery. An individual fisher’s share of group profit is
equal to the percentage of total effort that she provided. Use the above
table to derive the following:
10. Suppose the fishers agree
to each provide 1 unit of effort (e.g., 1 fishing trip each) in order to
achieve the maximum level of group profit for a fishery. How much profit would each
individual fisher receive if each of the eight provides 1 unit of effort,
as they agreed (total effort = 8)? Show your work.
Individual fisher’s profit at
group optimum = $175 = $1,400/8 group profit at E = 8 is $1400
11. Suppose one of the
fishers decides to cheat on this agreement and provide 5 units of effort, while
the other 7 continue to provide 1 units of effort each. How much profit would
the cheater receive if she provides 5 units of effort, while the other 7
fishers continue to provide 1 unit of effort each (total effort = 12)? Show
your work.
Cheater’s profit = $375 =
(5/12)*900
Group profit at
E = 12 is $900; cheater supplies 5/12 of total group effort
12. How much profit would each
of the 7 individual non-cheaters receive if they continue to provide 1 unit
of effort, while the cheater provides 5 units of effort (total effort = 12)?
Show your work.
Individual non-cheater’s
profit = $75
= (1/12)*900
Group profit at
E = 12 is $900; cheater supplies 5/12 of total group effort
Briefly explain in words how
this example relates to the incentive to over-fish and perhaps lead to tragedy
of the commons.
The individual
who cheats on the group-optimal agreement and overfishs receives a larger
profit than those who keep to the agreement. This creates an incentive to
overfish.