Name ______________________________________________________________Natural Resource Economics, Econ 3535Instructor: Vijaya R. Sharma, Ph.D.University of Colorado, Spring 2002Exam 2Answer all 30 questions, each worth 1 point.1. Reserves of an exhaustible resource that are profitable to extract at current prices are a. potential reserves.b. proven reserves.c. resource endowment.d. none of the above.2. A decrease in cost of substitute ________ the current rate of extraction of a resource.a. increasesb. decreasesc. increases or decreasesd. does not change3. When technological improvements add to proven reserves, the current rate of extraction of the resource would _________ and the stock would deplete _________.a. increase, soonerb. increase, laterc. decrease, soonerd. decrease, later 4. When does one observe recycling begin?a. when there exists a technology of recyclingb. when the price of virgin resource increases to the choke price level.c. when the price of virgin resource increases to the level of price of substituted. when the price of virgin resource increases to the level of marginal recycling cost5. Which is not true of an exhaustible resource that costs nothing to extract (MEC=0)? a. Price (P) of the extracted resource increases at the rate of discount (r).b. Net price (P-MEC) of the extracted resource increases at the rate of discount (r).c. Rent (=P-MEC) of the in-situ resource increases at the rate of discount (r).d. Rent (=P-MEC) of the in-situ resource is zero.6. The stock of an exhaustible resource may not fully deplete whena. MEC is zero.b. MEC is a non-zero constant.c. MEC is increasing with depletion of stock.d. any one of the above is true.7. Economic depletion refers to a. Full physical depletion of reserves of a resource.b. Marginal cost of extraction of a resource becoming high to the level of choke price or the price of substitute resource.c. consumers exhausting every penny of their full income on purchase of a resource.d. Rising prices of a resource that has no substitute.8. In a free and competitive market that is following the efficient path of extraction, doesthe depletion of a resource come as a surprise to consumers?a. Consumers are not surprised. They gradually cut down consumption when the price of the resource increases with increasing scarcity. They voluntarily switch over to another substitute when the resource depletes.b. Consumers are surprised, and this is reflected as a shortage of the resource in the market at the time of depletion, i.e., the resource becomes unavailable, in spite of existing demand.c. The resource never depletes, so there is no issue of consumers getting surprised.d. None of the above is true.9. Consider two reserves of a resource that have constant but different marginal extraction costs. Which statement is not correct? a. Extraction of the higher-cost reserve begins only when the lower-cost reserve is fully physically depleted. b. The in-situ resource of the higher-cost reserve commands no rent in the stock market when it is not being extracted.c. The rent of the in-situ resource in the higher-cost reserve increases progressively over time, irrespective of whether this reserve is being yet extracted or not.d. Irrespective of which reserve is being extracted, the net price (P - MEC) would beequal to the rent () of in-situ resource of the reserve being extracted. 10. Which increases the current rate of extraction?a. Increase in MECb. Decrease in market competition among extracting firmsc. Increase in discount rate of extractorsd. Imposition of a new tax on pollution generated during extraction11. Which is likely to decrease the price of an extracted resource now and in near future?a. Increase in discount rateb. Increase in marginal cost of extractionc. Increase in backstop priced. Increase in demand 12. Why is a monopolist considered the friend of conservationists?a. Because a monopolist internalizes externality even in the absence of pollution control lawsb. Because a monopolist sets its selling price lower than the competitive levelc. Because a monopolist invests resources on development of backstop substitutes ofnon-renewable resourcesd. Because a monopolist extracts resource at a slower pace than the competitive level13. If firms ignore external costs of extraction of a resource (negative externality), the resource would be extracted ____________ the efficient rate of extraction.a. slower thanb. faster thanc. slower or faster thand. at14. In the context of the reading, "The New Economics of Oil," which explains the consistent decline in oil prices?a. Impatience of producersb. Decline in MECc. Addition to proven reservesd. All of the above15. A price ceiling on an exhaustible resource _________ conservation of the resource and causes _______ transition to its substitute when the resource is depleted. a. encourages, smoothb. discourages, abruptc. encourages, abruptd. discourages, smooth16. In general, the shape of marginal recycling cost over time is a. downward-sloping.b. upward-sloping.c. upward-sloping in initial periods and downward-sloping in later periods.d. downward-sloping in initial periods and upward-sloping in later periods.17. Which does not cause market failure in extraction of exhaustible resources?a. Technological improvementsb. Lack of competitionc. Negative externalityd. Divergence between social discount rate and private discount rate18. 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 resource19. The knowledge that a technology is now available for closed loop recycling of scraps of a resource is likely to _______ the price of virgin resource.a. increaseb. decrease c. not affectd. initially increase and later decrease 20. How is the net price (P-MEC) of extracted resource related to the rent () of in-situ resource, in the efficient path of extraction?a. P-MEC = b. P-MEC > c. P-MEC < d. Indeterminate21. According to "The New Economics of Oil," the cost of finding new reserves of oil has been consistently declining. What is its implication to the rent of in-situ oil?a. Rent should have been declining too.b. Rent should have been consistently increasing.c. Rent should remain unaffected.d. Impact of cost of finding new reserves on rent is indeterminate.22. According to the reading "Is Water Different?"a. Consumers cannot reduce consumption of water at