Econ 435 Spring 04
Assignment 4 due Weds 11 February
Name:
1.) (Repeat) Resource Supply and Demand
(2 pts) Repeat question 6 from assignment 2 for the following resource: aluminum metal
“in general” (the entire world demand and supply).
a. Characterize the elasticity of short-run demand, and give a short explanation, as in
the example below. Your answer should characterize elasticity using one of the
following phrases:
Highly inelastic
Moderately inelastic
Moderately elastic
Highly elastic.
Use your best judgment: there is no absolute correct answer. I am looking for a
reasonable answer with a reasonable short explanation. Remember that elasticity
refers to how much quantity supplied or demanded would change in response to a
change in price.
b. Characterize the elasticity of long-run demand and give a short explanation.
c. Characterize the elasticity of short-run supply and give a short explanation.
d. Characterize the elasticity of long-run supply and give a short explanation.
e. Give an example of something which might cause the demand curve to shift
permanently. Note that this means that for any given price, the quantity demanded
would be either permanently higher or permanently lower.
f. Draw a supply and demand diagram with one demand curve and two supply curves:
a "short-run supply curve" and a "long-run supply curve." Label both supply curves.
The elasticity of the supply curves should reflect your answers to questions c and d.
Remember that the more inelastic the supply curve, the steeper it is. Both supply
curves should intersect with the demand curve at the same point.
Illustrate the shift in demand you described in answering (e) by drawing a new demand
curve represented by a dashed line.
g. Use your supply and diagram to show whether the effect on the price would be
“large,” “moderate,” or “small” in the short-run and whether the effect on the price would
be "large," "moderate," or "small" in the long-run.
In answering these questions, use the following format as an example:
Sample answer: WATER IN ARIZONA
a. Short run demand is moderately inelastic, because people can cut back on lawn
watering, car washing, etc. if the price of water rises
b. Long run demand is moderately elastic, because over time people can substantially
change their lifestyles to use less water (for example, installing toilets that use less
water to flush) and are likely to do so if the price of water rises.
c. Short run supply is highly inelastic, because there are no short-run sources of new
supply, even if the price rises a lot.
d. Long run supply is moderately inelastic, because over time new pipelines can be
built to bring water from distant sources if the price rises enough.
e. A permanent increase in demand might be caused by increased popularity of
swimming pools due to studies showing that swimming is good for your health.
f. see diagram:
P
Ssr
Slr
P1
P2
P0
D1
D0
Q
g. The effect is large in the short run.
The effect is moderate in the long run.
2. Externalities.
Suppose farmers have available five units of fertilizer each year which costs them
nothing to use (they get it for free--guess where!). Fertilizer from farmers' fields gets
washed by rain water into a river which is the water supply for the town in which the
farmers live. The fertilizer results in higher crop output, but causes increased costs for
the town because the water has to be purified before it can be drunk. To make this
problem simple, assume that there are no other uses or users of the water. The value of
crops and the cost of cleanup are as follows:
Amount of fertilizer
0
1
2
3
4
5
Total Value of crops
20
36
48
56
60
62
Total Cost of purification
0
5
10
15
20
25
2.1) (1 pt) What is the economically efficient level of fertilizer use – the level that
maximizes total value of crops less the cost of water purification.
2.2) (1 pt) Suppose the town decides to tax fertilizer use because of the water pollution
that it causes. Their consulting economist tells them that this one is a no-brainer: The
tax should be $5 per unit of fertilizer because the marginal external cost from fertilizer is
constant at $5 per unit. Is she right? How much fertilizer will farmers choose to apply if
they face a tax of $5 per unit, if they are trying to maximize
2.3) (1 pt) Suppose the town has the legal right to ban fertilizer and is considering such
a ban. Farmers then offer to pay the town for the right to use some fertilizer. If the town
wants to get the level of fertilizer use down to three units of fertilizer, how much
payment should it demand for the right to use three units and how much might farmers
be willing to pay for this right?
2.4) (1 pt) Now suppose the farmers have the legal right to pollute the water and
therefore they are using 5 units of fertlizer and the town is paying 25 in purification
costs. What is the maximum the town would be willing to pay the farmers to REDUCE
fertilizer use from 5 units down to 3 units? What is the minimum the farmers would
accept to make this reduction?
3. Tussing Reading on “Resource Disposition Systems”
3.1 (1 pt) Choose one word from this reading whose meaning you do not understand.
Define the word and use it in a sentence. (Latin phrases are fair game).
3.2 (2 pts) Tussing offers 10 rules for resource management systems. Choose any two
rules. In one paragraph for each rule, summarize the rule and the reasoning
behind it in your own words. You can write EITHER as an economist speaking to
fellow economists or as a journalist writing for the public. Indicate which role you
are assuming. If you choose economist, try to be as precise as possible and use
whatever economics jargon you wish. If you choose journalist, explain as clearly
as possible without any econ mumbo-jumbo.
3.3 (1 pt) Suppose you own a stand of timber that includes several salmon streams. For
a very long time the rules have been that there is no timber cutting allowed within
50 feet on the stream bank on either side. What happens to the market value V1
of this asset if the State of Alaska suddenly announces that the required width of
the "no-cut buffer zone" is immediately increased from 50 feet on either side of
the stream to 200 feet. What do we economists call this change in value? If the
state then changes the rules back to 100 feet and then changes them again back
to 50 feet, do you think the market value will revert all the way back to V1? Which
of Tussing's rules does this question apply to most directly?