# hw1ee11 - Homework 1 Environmental Economics ECO 345 Due...

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Homework 1: Environmental Economics: ECO 345 Due: Wednesday, September 14, 2011 Question 1 (12 points). For each of the following, indicate whether or not the allocation is efficient. If not, come up with a Pareto preferred allocation. a. There exists 15 frisbees and 10 pairs of cleats. Dave is allocated 15 frisbees and 10 pairs of cleats, with Luke getting nothing. b. There exists 15 frisbees and 10 pairs of cleats. Dave and Luke are each allocated 7 frisbees and 5 pairs of cleats. c. Dave has 10 frisbees and 4 pairs of cleats and Luke has 5 frisbees and 6 pairs of cleats. At this point, Dave’s marginal rate of substitution of frisbees ( f ) for cleats ( c ) is MRS D fc = - 2 (Dave is indifferent between 1 more frisbee and two pairs of cleats). Luke’s marginal rate of substitution is MRS L fc = - 1. Question 2 (20 points). Ralph owns a coal-fired power plant and wants to install a more efficient generator. The generator costs \$1 million, but would lower Ralph’s fuel costs by \$5 million. The utility regulators require that \$3 million of the fuel savings be passed on to his customers in the form of lower rates. New Source Review (NSR) regulations requires power plants which make major upgrades

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