Spring 2008 Exam 2 Solution

Here are the final numerical results for each section of version P of the exam.  You can use them to check your work if you do the exam for practice.  If you have trouble with the problems, or don't get the answers shown here, stop by during office hours or make and appointment and we can go over them.

Question 1

(a) 9000 visitors; (b) $187,500 CS per year; (c) PV of keeping the land as a public beach is $3.75 million.

Question 2

(a) NPV of leaving the area natural in period 0 is $78 million. (b) The dam should not be constructed because the NPV exceeds the $72 million from conversion.  The main reason the number is higher is the option value of getting to decide on conversion in period 1 after finding out whether benefits are $20 million or $200 million.

Question 3

(a) EV of medical discovery per square mile is $5,000; existence value to Brazilians per square mile is $10,000; total value per square mile is $15,000.  (b) Amount of land to convert to soybeans is 300 square miles.

Question 4

(a), (b) Efficient Qd is 4000 and Qs is 2000; (c), (d) prior appropriation Qd is 5000 and Qs is 1000; (e) DWL of market equilibrium is $625,000.

Question 5

 (a) table for the no-backstop case is shown below:

 (b) table for the backstop case:

(c) total amount produced via the backstop = 300.

Question 6

(a) 350; (b) the table is shown below:

Note that the royalty on land-based gas is equal to the price since the MEC = 0; (c) quantity of gas found = 375 units; (d) expected number of wells = 375; (e) amount spent on exploration = $93,750.