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hw3_neil_solution

# hw3_neil_solution - Homework#3 Environmental Economics Due...

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Homework #3 Due 4/21/2010 Environmental Economics 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) 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 = * 44 Age 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? Profit=revenue – cost =P*Q-cost =30*feet-20 =30*44*age 1/2 - 20 =1320*age 1/2 – 20 PDV of profit= (1320*age 1/2 – 20)/(1+0.08) age Solution from excel:

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hw3_neil_solution - Homework#3 Environmental Economics Due...

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