Problem_Set_3-Spring2014_soln-update

# 419417 9417 13278 in 2012 4113278 13278 18722 in 2013

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Unformatted text preview: 2011 .41*9417 + 9417 = 13278 in 2012 .41*13278 + 13278 = 18722 in 2013 . 41 * 18722 + 1 8722 = \$ 26,298 i n 2014 (in reality, current spot market price for lithium carbonate is between \$5,000 and \$6,000 per metric ton) 2) Water, now and later. Suppose Milwaukee has total urban demand for water from Lake Michigan such that the marginal net benefits are P = 1 – 0.04Q each year; P is in dollars and Q is in billions of gallons. If the Great Lakes Compact limits Milwaukee to 40 billion gallons of consumption over two years, answer the following questions. Let the discount rate be 5%. A) [4] How much would the city consume in each year if water were not limited? M N B now = P0 1- 0.04Q0 M N B next year = P1 = (1- 0.04Q1)/(1+.05)1 To solve for this, think about the MOST amount of water the city could consumer and still have positive net benefits: When MNB&gt;0 the consumed gallon is good, if MNB&lt;0 it is bad. So Find where it is zero and solve for Q. 0 = 1- 0.04Q0 and 0 = (1- 0.04Q1)/(1+.05)1 Now ____25 billion gallons______, Next Year ____25 billion gallons_____ UWM Econ 328 Professor Grant Spring 2014 [6] How much do they consume in each period under the agreement? Set the two equations equal to each other (gives inter-temporal efficiency) 1- 0.04Q0 = (1- 0.04Q1)/(1+.05)1 Use the constraint of 40 gallons per two years: Q0 + Q1 = 40 Q0 = 40 - Q1 and put this in the previous equation: 1- 0.04 (40 - Q1) = (1- 0.04Q1)/(1+.05)1 1- 0.04*40 – (- 0.04)Q1 = 1/1.05 – 0.04Q1/1.05 -0.6 + 0.04Q1 = 0.95 – 0.038Q1 0.038Q1+ 0.04Q1 = 0.95 + 0.6 0.078Q1 = 1.55 Q1 = 1.55/0.078 = 19.87 BILLION GALLONS So 40 – 19.87 = Q0 = 20.13 BILLION GALLONS Now ______20.13 billion gallons _______, Next Year ______19.87 billion gallons _______ B) [2] If population is growing by 5% per year and was not taken into account in the marginal net benefit, how should we alter the so...
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## This homework help was uploaded on 04/07/2014 for the course ECON 328 taught by Professor Mcginty,m during the Spring '08 term at Wisconsin Milwaukee.

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