Homework #3
Due
4/21/2010
Environmental Economics
Work individually!
This homework focuses on natural resource economics. You can answer these questions
using calculus, or plug in values to find the solution using Microsoft Excel (or Matlab).
The calculus solutions are not “neat”, so we recommend Excel.
Hint #1:
The Present Discounted Value (PDV) of a payoff of $X in two years =
X/(1+r)
2
where r is the market rate of interest.
Hint #2:
Expected Present Discounted Value =
probability that a payout takes
place*PDV
The Setup:
You own one tree.
Its height measured in feet is a function of the tree’s age
measured in years.
Here is the production function.
Feet =
Assume that the real price per foot of wood always equals $30.
Suppose that the cost of
cutting down your tree is $20 (note: not per foot, this is a fixed cost).
Assume the interest
rate always equals 8%.
1.
If your goal is to maximize the present discounted value of your profits, what age
will you cut this tree down (you can use integers for the age)? Hint: you don’t
This preview has intentionally blurred sections. Sign up to view the full version.
View Full Document
This is the end of the preview.
Sign up
to
access the rest of the document.
 Spring '08
 BRESNOCK
 Economics, Environmental Economics, Opportunity Cost, Time Value Of Money, Interest, Probability theory

Click to edit the document details