University of Colorado, Fall 2000

1. Are potential reserves proven economical for extraction?

1. Not at current prices, but they would become economical later when prices increase sufficiently.
2. No, they are preliminary estimates of reserves and have yet to be assessed for feasibility of extraction.
3. Yes, they are economical for extraction at current prices.
4. Potential reserves are strategic reserves of sensitive national security related resources, and their feasibility of extraction is irrelevant.

1. In the efficient path of extraction, how would the rent (l ) of an in-situ resource in the stock market compare with the net price (P-MEC) of the resource in the flow market?

1. Rent would be higher than net price.
2. Rent would be lower than net price.
3. Rent would be equal to net price.
4. There is no definite relationship between rent and net price.

1. According to the Hotelling rule, when the marginal cost of extraction (MEC) of a resource is zero, its price (P) in the efficient path of extraction with no unanticipated new findings and no technological changes would

1. increase over time at the rate of discount (r).
2. decrease over time at the rate of discount (r).
3. remain the same over time.
4. sometime increase and sometime decrease over time.

1. Which is correct about depletion of stock of an exhaustible resource at the time of switch over to backstop resource?

1. Stock is completely physically depleted, irrespective of the nature of marginal cost of extraction.
2. Stock is never completely physically depleted, irrespective of the nature of marginal cost of extraction.
3. Stock would be completely physically depleted when marginal cost of extraction increases with depletion of stock.
4. Stock would be completely physically depleted when marginal cost of extraction is constant.

1. When MEC increases with depletion of stock, the rent of in-situ resource _________ over time in the efficient path of extraction.

1. decreases
2. increases
3. stays the same
4. is zero

1. According to Pearce and Turner in their paper, "The Effects of Changing Parameters," which is likely to increase price of an exhaustible resource?

1. Increase in stock or size of reserve of the resource
2. Increase in demand for the resource
3. Decrease in marginal extraction cost
4. Decrease in price of substitute

1. According to Solow in his paper, "The Economics of Resources or the Resources of Economics," which could explain discount rates of private firms exceeding social discount rate?

1. Some individual risks are not risks to society (e.g. nationalization of private property).
2. Consequences of individual risks are concentrated to the risk taker, whereas consequences of social risks are spread over a large population.
3. Firms care about after-tax profits, whereas there is no difference between before-tax and after-tax profits to society.
4. All of the above are valid reasons that private discount rate may exceed social discount rate.

1. Which role Solow prescribes to government to promote efficient extraction of exhaustible resources?

1. Indicative planning and dissemination of information on reserves, technological development, prices, and costs of extraction and resources
2. Promotion of futures market of resources
3. Graduated severance tax (lower rate of taxation on extractions deferred to future)
4. All of the above

1. Suppose there are two reserves of a metal, one costs $80 a ton and another $30 a ton to extract (constant marginal costs). Metal extracted from either reserve would sell for the same price and assume that price exceeds the marginal costs. According to Solow, which reserve would be extracted first?

1. $80 a ton reserve
2. $30 a ton reserve
3. Both reserves would be extracted at the same time.
4. Which reserve would be extracted is unknown.

1. Flow market in the context of an exhaustible resource is the market for

1. extracted resource.
2. in-situ resource.
3. resource available in liquid form.
4. resource characterized by volatile prices.

1. Faster rate of extraction of a resource is likely to ______ its price and ______ physical depletion of its stock.

1. increase, delay
2. decrease, delay
3. increase, expedite
4. decrease, expedite

2. Private discount rates higher than that of society would

1. slow extraction of resources below efficient level.
2. accelerate extraction of resources above efficient level.
3. not affect rate of extraction of resources.
4. affect rate of extraction, but in unknown direction.

1. Relative to perfect competition, monopoly extraction of stocks of a resource ___________ time of physical depletion of stocks.

1. prolongs
2. shortens
3. maintains
4. has uncertain effect on

1. Which will not decrease the price of a resource in the flow market?

1. Technological improvements decreasing marginal cost of extraction
2. Findings of new reserves
3. Increase in discount rate
4. Flow market getting less competitive

1. What does a price ceiling (higher than constant MEC and lower than P_b) do to current rate of extraction of a resource?

1. It accelerates current rate of extraction.
2. It causes resource stock to deplete sooner.
3. It causes price to jump at the time of switchover to substitute, to make substitute economical to extract.
4. It causes all of the above.

1. According to the Hotelling model, resource prices generally _______ over time and only temporarily may _______ with unanticipated changes in technology and reserves.

1. increase, increase
2. increase, decrease
3. decrease, decrease
4. decrease, increase

1. Given a fixed amount of domestic reserves of a sensitive resource, what is the user cost of discouraging imports of the resource for the sake of reducing vulnerability of national security?

1. Amount of import tariff collected from imports of the resource
2. Amount by which the price of the resource would increase
3. Value of amount of imports replaced with domestic supply
4. Potential future vulnerability of national security, because domestic reserves are being depleted to reduce current vulnerability

1. According to "The New Economics of Oil," costs of finding new reserves of oil have been steadily declining over time. How might have this affected scarcity rent of oil over time?

1. It should be exerting downward pressure on rent.
2. It should be exerting upward pressure on rent.
3. It should be helping maintain rent.
4. It should have no influence on rent.

2. The knowledge that scrap of a resource can now be recycled is likely to _______ price of virgin resource.

1. increase
2. decrease
3. not affect
4. initially increase and later decrease

1. Recycling begins when price of virgin resource

1. increases to the level of marginal recycling cost.
2. decreases to the level of marginal recycling cost.
3. remains steady for a long time.
4. reaches the level of backstop resource.

1. According to the McClain's paper, "Recycling Programs," which is the factor contributing to rise of recycling of municipal solid wastes in the United States?

1. Increased environmental awareness among people
2. Lifestyle changes for increased use of packaged foods and products
3. Growing shortages of adequate disposal space
4. All of above

1. Closed-loop recycling, as opposed to open-loop recycling, is

1. reprocessing of scraps of a product into the same product.
2. reprocessing of scraps of a product into another product.
3. reprocessing of scraps of a product into both the same product and also into another product.
4. none of the above.

1. Benefit-cost analysis is

1. a method of allocating a fixed annual amount of a resource among many users.
2. a method of allocating a fixed reserve of a resource over many time periods.
3. a method of evaluating economic justification of a project.
4. none of the above.

1. Equimarginal principle is

1. equalization of marginal net benefits across all users for efficiently allocating a fixed annual amount of water.
2. equalization of marginal net benefits to zero for efficiently allocating a fixed annual amount of water.
3. equalization of total benefits to total costs for efficiently allocating a fixed annual amount of water.
4. ascertaining that benefit-cost ratio exceeds one.

1. To cope with seasonal and/or annual variability of availability of surface water, efficient allocation mechanism has to allow water rights to move from

1. higher value uses to lower value uses.
2. lower value uses to higher value uses.
3. lower value uses to lower value uses.
4. higher value uses to higher value uses.

2. In the paper, "Is Water Different?," Miller et. al. present evidences that

1. water has zero price elasticity of demand.
2. water is a necessity and should be provided to each household according to its requirement.
3. water, like most other commodities, obeys law of demand.
4. water consumption cannot be reduced by increasing its price.

1. What are the potential problems associated with ensuring efficient use of ground water?

1. common property nature of aquifers
2. discount rates of users exceeding the social discount rate
3. ignoring negative externalities associated with drying up of aquifers
4. all of above

1. The net present value (NPV) of a project is its

1. marginal net benefit.
2. present value of total benefits, net of present value of total costs.
3. benefit-cost ratio.
4. total initial investment to make the project operational.

1. Safe yield use principle is

1. to limit use of ground water to its rate of natural recharge.
2. a method of efficiently allocating ground water over many periods.
3. a method of allocating ground water across many users.
4. none of the above.

1. Allocation of one more gallon to user X from a fixed amount of available water comes at the expense of marginal net benefit denied to another user, because one less gallon is now available to another user. This is known as

1. marginal cost of supplying water.
2. marginal user cost of allocation.
3. vulnerability premium.
4. none of the above.

1a, 2c, 3a, 4d, 5a, 6b, 7d, 8d, 9b, 10a, 11d, 12b, 13a, 14d, 15d, 16b, 17d, 18a, 19b, 20a, 21d, 22a, 23c, 24a, 25b, 26c, 27d, 28b, 29a, 30b