Final - Answers

Spring 2006

Here are notes that will let you check your answers to the final exam. Please keep in mind that these are just the bottom line results and are NOT complete solutions that would be acceptable as answers on an actual exam.

Park Value

New number of visitors = 258. Intermediate step: values of A and B: A=8.9815, B=0.0154. Value of the park (CS) is $2614.

Risk Assessment

High dose risk to rats = 5/200 = 1/40. Current low dose in humans is 2/1000, or 1/500, of the rat dose. The risk to humans is thus (1/40)*(1/500) = 1/20,000 or 10 fatalities in the given population. Reducing the human dose to 1 mg would lower the risk to (1/40)*(1/1,000) = 1/40,000, or 5 fatalities in the population. The value of reducing the dose is thus 5 lives saved times $6M or $30M.

Allocating River Water

Part (a) Intermediate step: MSBs = 1000 - 2*Qs. Efficient allocation: Qs=300, Qd=900. W2Pd=MSBs=400. Part (b) Intermediate step: W2Pd=0, Qd=1100. CS gain to in drinking water = 40,000; CS loss in stream water = 120,000; net loss = 80,000.

Oil Extraction

Part (a) R1=400, R2=1200, R3=3600; P1=900, P2=1700, P3=4100; Q1=2400, Q2=1600, Q3=400. Part (b) R1=300, R2=900, R3=2700; P1=800, P2=1400, P3=3200; Q1=2800, Q2=2200, Q3=1300. Total production from the backstop=1900.

Exploration

As given, the problem was a bit ambiguous about the MEC of newly found gas reserves: the MEC was given for existing reserves but it did not explicitly say that the MEC would be the same for new discoveries.  Everyone who took the exam treated the MEC of new discoveries as zero, and since there was some ambiguity, that solution was accepted.  Here's how those calculations work out: break even price for drilling is 400 (solution to EV=-160+.2*2*P=0). Working backward: P2=400, R2=260, Q2=340; R1=130, P1=270, Q1=470. Total produced via exploration = 210.