Problem_Set_3-Spring2014_soln-update

You do not need to calculate the exact change just

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Unformatted text preview: lution and allocation? You do not need to calculate the exact change, just describe in a sentence or two how and why it changes and what you would need to do to calculate the new amounts. The growth would essentially offset the discount rate and we would probably consume about the same amount each year, or 20 billion gallons. C) [2] Return to the original assumptions above. What happens to the allocation in each period if the discount rate is 10% rather than 5%? You do not need to calculate the exact change, just describe in a sentence or two how and why it changes. As the discount rate INCREASES the amount for LATER is REDUCED we diminish how much we care about future use. So we use MORE NOW. UWM Econ 328 Professor Grant Spring 2014 3) A Shared Oil Play Joe and Matilda are two Texas landowners. Their plots share a border and an oil reservoir straddles the boundary. Each draws oil from the reservoir to sell on the crude oil market. Next year, Joe is losing his land to an environmental group and they will turn it a wildlife preserve; he wants to get all the oil now. Matilda knows this. Though the market demand is the same for both owners, their costs are different. Joe’s marginal net benefit for water is given by the curve MNBJoe: P = 24 – Q/3, and Matilda’s marginal net benefit for water is given by the curve MNBMaddy: P = 16 – Q/4. Notice that prices are in $/1000-Barrels and Q is in 1000-Barrels. There is an estimated 80,000 Barrels left in the play. A) [6] Plot the marginal net benefits for oil on a figure as shown above. Mark all axes, intercepts, and curves. Assume the width is 80 and have the curve MNBJoe intersect the Q-axis at point J and the curve MNBMaddy hit the Q-axis at point M. Determine the values of M and J (a.k.a. horizontal intercepts). Above B) [2] In t wo sentences, explain: What is marginal net benefit and why is it important to distinguish this concept from margin...
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