Natural Resource Economics, Econ 4535University of Colorado at Boulder, Fall 2006Exam 1Answer all 30 questions, each of equal weight.1. What concerns economists may have with utilization of natural resources?a. Possible irreversible damages to resourcesb. Possible inefficient utilizationc. Potential adverse impact on welfare of future generationsd. All of the above 2. What distinguishes a dynamic or inter-temporal allocation problem from a static or single-period allocation problem? a. The rule of economizing behavior does not apply to dynamic problems.b. Dynamic problems consider effect of current extraction on future extraction possibilities.c. Dynamic problems give relatively more weight to future benefits.d. Both a and b above are correct.3. What is not true of the anthropocentric economics view of natural resources? a. Natural resources are sources of raw materials and amenities.b. Natural resources are instruments to satisfy human preferences.c. Value of natural resources is independent of human preferences.d. All of the above statements are not true of the economics approach.4. What is correct about economic rent or scarcity rent?a. Economic rent is the scarcity value of a resource that is available in fixed supply.b. An increase in economic rent of a resource cannot lead to an increase of its quantity supplied. c. Economic rent of a resource rises as the demand for resource rises.d. All of the above statements are correct.5. People are said to have a positive rate of time preference for present. If so, why is it not then efficient to extract the entire reserve of an exhaustible resource now?a. It would always be efficient to extract the entire reserve now. b. Excessive extraction now would depress its marginal value, below the potential future marginal value resulting from increased future scarcity.c. It would always be efficient to extract equal quantities each year.d. None of the above is a satisfactory explanation.6. Assume that there is a positive rate of time preference and that there are no changes indemand, costs, and technologies over time. Which period is then likely to get a larger share of a fixed amount of a resource under the plan of efficient inter-temporal allocation?a. Present periodb. Future periodc. Both present and future periods get equal share.d. Present period may get larger or smaller share.7. Marginal user cost (MUC) of utilization of a natural resource isa. the price consumers pay to buy the resource.b. the marginal cost of extraction of the resource.c. an out-of-pocket expense incurred by suppliers on top of cost of extraction to bring the extracted resource from the extraction site to the homes of consumers.d. a potential net gain that could have been made by postponing current extraction ofthe last marginal unit of the resource to the next period. 8. Are “potential reserves” proven to be economical for extraction?a. Not at current prices; they would become economical later when prices rise sufficiently.b. No; they are preliminary estimates of reserves and have yet to be assessed for feasibility of extraction.c. Yes; they are economical for extraction at current prices.d. Potential reserves are strategic reserves of sensitive national security related resources, and their feasibility of extraction is irrelevant.9. In the efficient path of extraction, how would the rent () of an in-situ resource in the reserves (asset) market compare with the net price (P-MEC) of the resource in the flow market?a. Rent would exceed the net price. b. Net price would exceed the rent.c. Rent would be equal to the net price.d. There is no definite relationship between rent and net price.10. According to the Hotelling Model, when the marginal cost of extraction (MEC) is zero, the price (P) in the efficient path of extraction would (with no changes in demand and other factors)a. rise over time at the rate of discount.b. fall over time at the rate of discount.c. remain constant over time.d. sometime rise and sometime fall over time.11. What explains that private discount rate of producers may exceed the social discount rate? a. Some individual risks are not social risks.b. Private risks are concentrated to the risk taker, whereas social risks are spread over a large population.c. Firms care about after-tax profits, whereas there is no difference between before-tax and after-tax profits to society.d. All of the above are valid reasons that private discount rate may exceed social discount rate. 12. 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. Which reserve would be extracted first? a. $80 a ton reserveb. $30 a ton reservec. Both reserves would be extracted at the same time.d. Which reserve would be extracted is unknown.213. Flow market 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. 14. A faster rate of extraction of a resource is likely to ______ its price (P).a. raise b. depressc. keep unchangedd. raise or depress15. What does a price ceiling do to current rate of extraction of a resource? e. It raises current rate of extraction. f. It depletes reserve sooner.g. It causes price to jump to the level of substitute when the reserve depletes.h. It causes all of the above.16. Compared to perfect competition, the reserve of a resource under monopoly extraction e. Lasts for a longer time. f. Lasts for a shorter time.g. Lasts for the same duration of time.h. May last for a longer or shorter time. 17. What may cause an immediate rise in the price of resource in flow market? a. A new reserve has been discovered. b. Demand for the resource has increased. c. A new technology has been discovered that reduces marginal extraction cost.d. The price of substitute has decreased.18. A renewable resource substitute that can be made available at a fixed cost or price is calleda. Backstop resource b. Flow resourcec. Stock resourced. Front-end resource 19. Which ensures inter-temporal efficient allocation of a fixed-supply resource?a. P=MECb. P=MUCc. P=MEC+MUCd. None of the above20. What maximum price an extracted resource can command? a. choke priceb. price of substitutec. choke price or price of substitute, whichever is lowerd. There is no limit on maximum price.