PS4 - EEP101/ECON125 Spring 99 Prof. D. Zilberman TAs:...

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EEP101/ECON125 Spring 99 Prof. D. Zilberman TA’s: Malick/Marceau PROBLEM SET 4 Due Thursday, April 22, 1999, in class (Late assignments will not be graded) 1. The private owner of a forest can sell lumber at a fixed price. He owns 10,000 acres of timber which consists primarily of old-growth forest. If left unharvested, the amount of timber in the forest grows by 2% annually. Timber sells at a price of P dollars per volume per acre cut, and for simplicity, assume there are no harvesting costs. Finally, assume that trees which are harvested take very long to regrow, so cut areas are effectively gone from the calculation after the harvest. (a) If we assume that the nominal interest rate is currently 6%, the expected inflation rate is 3%, and the forest owner is harvesting at a constant rate of 400 acres annually, which is sold at the end of each year, what would the government need to pay him to induce him to stop logging for preservation purposes? (b) Assuming he follows the 400 acres per annum logging policy, if the expected inflation rate
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PS4 - EEP101/ECON125 Spring 99 Prof. D. Zilberman TAs:...

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