Natural Resource Economics, Econ 4535University of Colorado at Boulder, Spring 2006Instructor: Vijaya Sharma, Ph.D.Exam 2There are 21 multiple choice questions (one point each) and three short answer questions (three points each) in this test. 1. In the efficient path of extraction, how would the scarcity rent () of an in-situ resource in the asset market compare with the net price (P-MEC) of the resource in the flow market?a. Rent would be higher than net price. b. Rent would be lower than net price.c. Rent would be equal to net price.d. There is no definite relationship between rent and net price.2. Does the stock of an exhaustible resource completely deplete at the time of switch over to backstop resource? a. Stock is always completely depleted at the time of switch over to backstop resource.b. Stock is never completely depleted at the time of switch over to backstop resource.c. Stock would be completely depleted if the marginal cost of extraction rises with depletion of stock.d. Stock would be completely depleted if the marginal cost of extraction remains constant with depletion of stock.3. What role Solow prescribes to government to promote efficient extraction of exhaustible resources? a. Indicative planning and dissemination of information on reserves, technological development, prices, and costs of extraction and resourcesb. Promotion of futures market of resourcesc. Graduated severance tax (lower rate of taxation on extractions deferred to future)d. All of the above 4. Flow market in the context of an exhaustible resource is the market for a. extracted resource. b. in-situ resource. c. resource available in liquid form.d. resource characterized by volatile prices. 5. When private discount rate exceeds the social discount rate, a. market rate of extraction of a resource will be lower than the efficient rate.b. market rate of extraction of a resource will be higher than the efficient rate.c. market rate of extraction of a resource will remain equal to the efficient rate.d. market rate of extraction of a resource may be lower, higher, or equal to the efficient rate.6. Compared to perfect competition, the stock of a resource under monopoly extraction a. Lasts longer period. b. Lasts shorter period.c. Lasts the same period.d. May last longer or shorter period. 7. New information that scrap of a resource can now be recycled is likely to _______ the current price of virgin resource.a. increaseb. decrease c. not affectd. initially increase and later decrease 8. Recycling begins when price of virgin resource a. rises to the level of marginal recycling cost.b. falls to the level of marginal recycling cost.c. remains steady for a long time.d. reaches the level of backstop resource.9. According to the equimarginal principle, find the allocation of a fixed available annual quantity of water such that a. marginal net benefits become equal for all users.b. marginal net benefits become equal to zero for all users.c. total benefits become equal to total costs.d. the benefit-cost ratio becomes equal to one.10. The paper "Is Water Different?" provides research evidences that a. water has zero price elasticity of demand.b. water is a necessity and should be provided based on requirements approach. c. water like most other commodities obeys law of demand. d. water consumption does not reduce even when its price is raised. 11. Reallocation of an additional gallon of water to User X comes at the expense of marginal net benefit that another user enjoyed from that unit of water. This expense isknown asa. marginal extraction cost.b. marginal user cost.c. vulnerability premium.d. none of the above.12. According to the Hotelling model, which event may cause an immediate rise in price?a. A new reserve has been discovered. b. An increase in demand for the resource has been observed. c. A new technology has been discovered that reduces marginal extraction cost.d. The discovery of a new technology is anticipated to lower the price of substitute.13. A renewable resource substitute that can be made available at a fixed cost or price is called ______________.a. Backstop resource b. Flow resourcec. Stock resourced. Front-end resource214. According to the Warehouse Concept expounded in McCabe’s paper,a. energy producers build a warehouse to store their outputs. b. energy producers build a warehouse to store their inputs. c. energy retailers build a warehouse to store energy products. d. there is constant upgrading of the size of operating reserves and the size of recoverable reserves as more information become available and as technology andmarket situations evolve. 15. What is correct about the "resource pyramid" presented by McCabe in his article?a. In the upper layers of the pyramid, reserves are of high quality, but small in volume.b. In the lower layers, reserves are of lower quality, although large in volume. c. Marginal extraction cost rises gradually as extraction proceeds to lower layers. d. All of the above are correct. 16. In the paper on water problem in the Douglas County, the author points out that the County is withdrawing water from a a. non-tributary groundwater aquifer.b. tributary groundwater aquifer.c. surface water source.d. none of the above. 17. The tap fee for water in Douglas county is primarily an indicator ofa. marginal cost of pumping water out of aquifer.b. scarcity rent of water in the county.c. the sum of a and b above.d. equitable distribution of water among residents in the county. For the next five questions, see the graph below. A non-renewable resource is being extracted efficiently from its reserves for the last t number of years. The MEC is assumedconstant. PB is the price of substitute backstop resource. The efficient price path starts from P0 and is expected to rise over time to reach PB in Year T0. The price path has two sections - the solid line section and the dotted line section. The solid line shows the pricesthat prevailed in the past. The dotted line represents the future anticipated price path. You are being asked to determine how the dotted-line price path would change if the government imposes a previously unanticipated price ceiling (PC), for all times in future starting from Year t. $ per ton of resource PBBackstop price PCPrice Ceiling P0 MEC0 t Te T0 Tltime318. If the price ceiling were never imposed, the reserves of the resource would have been depleted in Year T0. At what rate would have