Spring 2014 Exam 2 Solution

Here are the final numerical results for each section 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) Pp=$40.

(b)-(d) Permits issued: Qp1=50; Qp2=25; Qp=45.

Other information:  total abatement=280; Qa1=160; Qa2=80; Qa3=40; TCA=$5600; total pollution or permits=120.

Question 2

(a) Qa=150, MCA=$700.

(b) Qp=250.

(c) Efficient Qa=200.

(d) Actual Qa=150.

(e) Pp=$500.

(f) DWL=$5000 (because the pollutant is undercontrolled). 

Question 3

(a) 63,350.

(b) A=$112.5, B=0.0010.

(c) CS = $6.4M.

(d) Total benefit=$11.4M.

(e) NPV = $25.8M (includes option value).

(f) Should not sell.

Question 4

(a) Cases per year: A=35, B=100, total=135.

(b) Fatalities prevented by policy 1: A=15.

(c) Fatalities prevented by policy 2: A=10, B=25, total=35.

(d) NPV of policy 1=$800M.

(e) NPV of policy 2=$1.3B.

(f) Policy 2 should be chosen.

Question 5

(a) Without the backstop:

Period	R	MEC	P	Q
0	$120	$400	$520	240
1	$240	$300	$540	480
2	$480	$300	$780	610
Total				1330

(b) With the backstop:

Period	R	MEC	P	Q
0	$50	$400	$450	275
1	$100	$300	$400	550
2	$200	$300	$500	750
Total				1575

(c) Amount from backstop=245.

(d) Backstop used in period 2.

Question 6

(a) P=$60.

(b) R on conventional deposits=$50 (note: R on unconventional deposits=$30); P=$60; total Q=560.

(c) Amount found=160.

(d) Expected wells=32.