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Assignment #1

Chapter 3:  application #3.1, part A

  This is pretty much the same problem as the one in the box on page 36. You have two questions being asked: 1. How many new mills will be built after the fourth? Or, in other words, at what point will one more mill around the lake cost more than it earns in revenue? Mills will crowd around the lake until that point at which no more profit can be made. So, for example, if the next mill can earn total revenue of $1000 and incur total costs of $999, it will be built. 2. How many mills will maximize total combined profits for the industry? In other words, when will an additional mill cause total industry profits to fall?

  Each mill will have to pay an extra $.15 per ton to clean up the added gunk associated with an additional mill. This is an external cost that the government forces them to internalize by adding more waste water treatment facilities. Let's start  you off with the table.

Hint: As long as average revenue exceeds marginal cost another mill will be added to the lake. But only as long as average revenue exceeds average cost will another mill increase total industry profit.

Assignment #2

Chapter 4: application #4.1

This problem is similar to the problem in Exam 1 about the polluter Annie and Downwind Danny. The difference is that we now have two producers operating adjoining businesses. There is no fence around Roy's ranch and with every cow he adds to his herd (starting with the first) they will stray onto Fern's farm causing external damage that reduces Fern's total revenue by the amount given in the table for MCD. If Roy doesn't raise any cattle then Fern will always earn total revenue of $12 and pay total cost of $10. 

The best way to tackle this problem is to construct two tables. The first assumes Roy pays no damages and raises the number of cows that maximizes his profits (TR - TCP).  This answers part a: How many cows Roy will raise to maximize his profit and whether or not Fern will farm, i.e., can she make a profit or break even when Roy maximizes profits. Here is the first table and some values to get you started. The second table assumes Roy must pay for the damages to Fern's farm. Remember, the efficient outcome (part c) is only concerned with maximizing the total combined profit of the two operations.

                               Roy pays nothing for the damages to Fern's farm

___________________Roy's Ranch_________      ______Fern's Farm_________

                                    Roy pays for the damages to Fern's farm

_______________Roy's Ranch_____________      _______Fern's Farm________

Chapter 5 Application #5.0

1. Look at the graph on page 59. Where is the most efficient point of pollution reduction?

2. This is like the landfills case and also the film we saw on G.E. Pittsfield. How is it possible for companies to claim there may have been no damage?

3. Remember what a regressive tax is.

Chapter 6 Application # 6.1

1. The equation is PDV = 450/(1+.10)¹⁰. You can use the on-line calculator http://www.moneychimp.com/calculator/present_value_calculator.htm instead of doing the tedious calculations if you don't have a financial calculator.

2. How much does Pandora need to invest today to compensate Bacchus in ten years? See the answer to #1.

3. You should be able to answer this when thinking about who is hurt.

4. Remember Neoclassical sustainability is less rigorous than the Sustainability Standard.