Environmental Economics Multiple Choice and TRUE AND FALSE

  
Environmental Economics
TRUE OR FALSE – EXPLAIN 

The demand for oil in Alaska is given by 8−0.4q while the supply is 2. If Alaska has 20 barrels of oil for two years and the interest rate is 10%, it is better for Alaska to extract 5 barrels in year one and 15 barrels in year two than to extract 15 barrels in year one and 5 barrels in year two. Alaska follows the Hotelling rule in their decision to extract oil. In 2017, the marginal extraction cost of oil was $2 and the price of oil was $2.70. In 2018, the marginal extraction cost was $2.2 while the price was $3. What was the interest rate in Alaska?

MULTIPLE CHOICE 

1. Water is the main production input for the beer brewing companies in Milwaukee and therefore, their profits heavily depend on the price of water. The marginal cost of all brewing companies is 300 + 0.8Q where Q is gallons of water. Notice, however, that 0.4Q of that cost comes from the water embedded in wheat, which is also used for beer production. Brewing companies use wheat produced in Kansas in the production of beer. Finally, the marginal benefit is 1200 − 1.4Q where Q is gallons of water. Consider that brewing companies are the only consumers of water in Milwaukee and that Milwaukee Water Works provides water for beer production. What is the market price of water in Milwaukee? 

(a) 500 
(b) 409 
(c) 627 
(d) none of the above.

2. Suppose the demand for oil in Alaska is given by 8 −0.4q while the supply is 2. Alaska only consumes its oil and the stock of oil is equal to 20 barrels for two years. If the interest rate is 10%, the government of Alaska will extract:

(a) X1 = 5 barrels in year one and X2 = 15 barrels in year two.
(b) X1 = 15 barrels in year one and X2 = 5 barrels in year two.
(c) X1 = 12.039 barrels in year one and X2 = 7.961 barrels in year two.
(d) X1 = 11.278 barrels in year one and X2 = 8.722 barrels in year two. 
(e) None of the above.