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Problem_Set_3-Spring2014_soln-update

Problem_Set_3-Spring2014_soln-update - UWM Econ 328...

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UWM Professor Grant Econ 328 Spring 2014 NAME ___________________________________ * Show all work, including basic calculations, to receive partial credit. * Due at 11am on Thursday, April 3 2014. No late work, no exceptions. * Must be typed (graphs can be drawn in but are pretty easy to create in ppt or excel) and stapled * Non-typed or non-stapled work will not be graded. 1) Hotelling Rules? Lithium is a mineral resource needed for batteries. The prices of pure lithium are given below for a few years (source: http://minerals.usgs.gov/ds/2005/140/ds140-lithi.pdf) Year Price/Ton r 2005 $1,220 --------- 2006 $1,880 0.54 2007 $2,770 0.47 2008 $3,360 0.21 A) [6] Assuming Hotelling’s Rule holds, fill in the estimated rate for years 2006, 2007, and 2008, using the previous year each time for each. HR is (P 1 – P 0 )/P 0 = r so solve this for each year using the previous: (1880-1220)/1220 = 0.54 B) [6] What is the average r for the three years? Does this r value make sense? If not, what other forces could be affecting the price? Average is (.54+.47+.21)/3 = 0.41 . This value seems too high, usually this should be similar to other market discounts rates or be getting close to it. There are numerous reasons price can go up faster than under the perfect conditions needed for Hotelling’s rule. Demand rose faster than expected, we could have been wrong about reserves of lithium, imperfect competition (one country controls much of the production and can limit it). If this is the case, you should buy it now and sell for LOTS more in a few years. C) [3] What price/ton for lithium would you predict for 2014 (use the average rate you found above)? (P 1 – P 0 )/P 0 = r P 1 = r* P 0 + P 0 then start at 2008 and use r = .34 .41*3360 + 3360 = 4737 in 2009 .41*4737 + 4737 = 6679 in 2010 .41*6679 + 6679 = 9417 in 2011 .41*9417 + 9417 = 13278 in 2012 .41*13278 + 13278 = 18722 in 2013 .41*18722 + 18722 = $26,298 in 2014 (in reality, current spot market price for lithium carbonate
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