Name ______________________________________________________Natural Resource Economics, Econ 3535University of Colorado, Spring 2001Instructor: Vijaya Sharma, Ph.D.Exam 2Answer all 30 multiple-choice questions, each worth 1 point.1. Everything else the same, people prefer present to future. Also, a present sum of money can be invested and generally compounded into a larger sum in future. The time preference and possible return on investment are incorporated in the economics of exhaustible resources by the use of _________________.a. Backstop price b. Discount ratec. Scarcity rentd. Marginal extraction cost 2. Flow market refers to the market of aa. resource extracted from its reserves.b. resource still lying in its reserves (in-situ resource).c. product obtained from further processing of a resource that has already been extracted from its reserves.d. renewable resource.3. Consider a reserve of an exhaustible resource that costs nothing to extract (MEC=0). Choose the best statement that characterizes the efficient path of extraction of the resource. 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. All of the above are true.4. Consider the case of a reserve where marginal extraction cost (MEC) increases progressively with depletion of stock. What happens to the scarcity rent () as extraction progresses and stock depletes over time, other things remaining the same? a. Rent remains constant over time.b. Rent increases over time.c. Rent decreases over time.d. Rent would be zero for all time.5. 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.6. Economic depletion of a resource refers to a situation when a. MEC increases to the level of choke price or the price of substitute resource.b. consumers exhaust their full income on purchase of the resource.c. no more stock of the resource is physically available to extract. d. no substitute of the resource is available.7. How high the price of an extracted resource goes at the time of full physical or economic depletion of stock?a. choke price b. price of substitutec. choke price or price of substitute, whichever is lowerd. There is no limit on how high the price can go.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 of the resource and 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. When there are two reserves of a resource that differ in marginal extraction cost, the lower-cost reserve is extracted and depleted first, before extraction begins in the higher-cost reserve. Choose the statement that best describes the rent of the higher-cost reserve when extraction has not yet begun in the higher-cost reserve.a. The higher-cost reserve commands no rent when it is not being extracted.b. Only when extraction begins in the higher-cost reserve, it will have a rent and the rent will then progressively increase with its depletion.c. The higher-cost reserve commands a rent even when it is not being extracted, because it is a potential substitute in the event of the depletion of the lower-cost reserve.d. Not only that the statement in c above is correct, the rent of the higher-cost reserve (even when it is not being extracted) increases progressively as the depletion of the lower-cost reserve gets closer. 10. Which expedites 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. A decrease in the price of substitute ________ the current rate of extraction of an exhaustible resource.a. increasesb. decreasesc. increases or decreasesd. does not change12. The unanticipated information that new reserves of a resource have been found ________ the current rate of extraction.a. increasesb. decreasesc. increases or decreasesd. does not change 13. Which is likely to decrease the price of an extracted resource?a. Increase in discount rateb. Increase in marginal cost of extractionc. Increase in backstop priced. Increase in demand 14. Why is a monopolist considered the friend of conservationists?a. Because a monopolist sets price equal to the competitive level.b. Because a monopolist sets price lower than the competitive level.c. Because a monopolist extracts resource faster than the competitive level.d. Because a monopolist extracts resource slower than the competitive level.15. 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. at16. Myopic behavior of flow market refers to a. inefficient extraction of resources, as a consequence of excessive emphasis of extractors on current events, with no regard to long-term perspectives.b. efforts of extractors to achieve equilibrium path of extraction.c. efforts of extractors to optimize society's net gains.d. efforts of extractors to increase benefits to consumers.17. 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 above18. What does the possibility of recycling do?a. It increases the effective stock size of the resource.b. It prolongs resource depletion time.c. It reduces price of the resource.d. All of the above19. 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, smooth20. In general, the shape of marginal recycling cost over time is