Question 1

Suppose that many consumers tend to over-state the discount rate that should be used for computing the net present value of education, just as they do when making investments in durable goods like cars and appliances. What would happen if consumers (as a group) started to use lower discount rates when making decisions about their education?

Accepted Answer

If consumers start using lower discount rates, then the net present value of education increases, meaning that the benefits of education are perceived as being worth more. This would result in an increase in demand for education.

Question 2

The authors claim that monopolists will tend to practice stronger conservation of depletable resources than would occur under a perfectly competitive market structure. Why is this true?

Accepted Answer

Monopolists tend to generate lower output levels than under perfect competition, so the resource is depleted at a slower rate by the monopolist. This is because a monopolist can charge a higher price for their product, so they don't need to extract as much of the resource to make a profit. The conservation of the resource serves as a long-term strategy for the monopolist to maintain their market power and profitability.

Question 3

Scenario 15.7:
Consider the following information:
You move to northern California and buy a winery that already holds a stock of some wine in barrels. You are deciding whether to sell the wine now, or keep it until next year. The current price of wine is $20 per bottle, and it costs $2 per bottle to get the wine from barrels to bottles.
-Based on the information in Scenario 15.7, if you expect the price to be $21 next year, you should:

Accepted Answer

The answer of Scenario 15.7:
Consider the following information:
You move to...

Question 4

Assume that you own an exhaustible resource that is sold competitively. The price of the resource is: P_{t + 1} - C = 1.08(P_t - C), where t = 0 at the beginning of 2005, and It is also known that the demand for the resource is: Q = 1,000,000 - 25,000 P, where Q represents output in tons per year. If the beginning of 2005 price is $30 per ton and the marginal cost of extraction is $10 per ton, what will the price be at the end of 2009? What is the user cost of production in 2009? Is it different from the user cost for 2005? Explain. How much of the resource will be extracted in 2009? What is the market rate of interest on money? Explain.

Accepted Answer

The answer of Assume that you own an exhaustible resource...

Question 5

The user cost of an exhaustible resource is:

Accepted Answer

The user cost of an exhaustible resource is the opportunity cost of using the resource today rather than saving it for the future. This means that by using the resource now, we are giving up the potential benefits and earnings that could have been obtained in the future if the resource was saved or conserved. The user cost is not necessarily the same as its price or production cost, and it is not related to the amount of the resource that exists or is extracted today.

Question 6

Over the long term, the ultimate determinant of the price of a depletable resource is the:

Accepted Answer

The user cost is the opportunity cost of using a depletable resource today, rather than saving it for future use. Over the long term, the price of a depletable resource must be high enough to cover the user cost, or else people will not be willing to use it.

Question 7

Which of the following statements is NOT true?

Accepted Answer

The decision to attend college should not be based solely on the NPV calculation as there are other factors such as personal goals, interests, and societal pressure that may influence the decision to attend college.

Question 8

From the Hotelling rule, we would expect that a perfectly competitive industry selling an exhaustible resource would:

Accepted Answer

The Hotelling rule suggests that in a perfectly competitive market, sellers of an exhaustible resource would aim to maximize their profits over time, leading to a faster rate of extraction and sale compared to a monopolist, who would restrict supply to increase prices and maximize profits over a longer period.

Question 9

The authors note that an appropriate discount rate for most U.S. households is near 5%. However, suppose you are considering the decision to attend graduate school, and you already have large credit card balances from your undergraduate years. If you decide to use a higher discount rate (e.g., 10%) to reflect your higher opportunity cost of money, what impact does this change in the discount rate have on the net present value of a graduate degree?

Accepted Answer

Using a higher discount rate (in this case, 10% instead of 5%) would decrease the net present value of a graduate degree. This is because a higher discount rate places greater emphasis on the immediate costs of attending graduate school (e.g. tuition, lost wages from not working) rather than the long-term benefits (e.g. higher salary, better job opportunities). The higher opportunity cost of money from credit card debt may be a legitimate concern for some individuals, but it should not be used to justify an unrealistically high discount rate.

Question 10

Suppose you plan to retire in eight years, but your boss would like you to earn an online MBA in order to take on a new managerial position. The firm will continue to pay your salary while you are working through the online courses, and the new position pays an additional $15,000 per year. The online MBA tuition is $35,000 per year, and your discount rate is 5%. Should you complete the degree?

Accepted Answer

We need to calculate the Net Present Value (NPV) of completing the online MBA in order to decide whether to pursue it or not.

First, let's calculate the additional earnings from the new managerial position over the remaining 8 years of the employee's career:

Additional earnings per year = $15,000
Number of years until retirement = 8
Total additional earnings = $15,000 x 8 = $120,000

Now, let's calculate the total cost of the degree program:

Annual tuition = $35,000
Number of years to complete = 2 (assuming a typical MBA program length)
Total tuition cost = $35,000 x 2 = $70,000

Using a discount rate of 5%, we can calculate the NPV of the additional earnings and the tuition cost:

NPV of additional earnings = $120,000 / (1+0.05)^8 = $81,483.52
NPV of tuition cost = -$70,000

NPV of completing the degree = NPV of additional earnings - NPV of tuition cost
= $81,483.52 - $70,000
= $11,483.52

Since the NPV is positive, the employee should pursue the degree as it would result in a positive benefit overall.

Question 11

The authors cite a recent study of MBA programs that compares pre-MBA salaries with post-MBA salaries. For some of the highest ranked schools, the salary difference was roughly $100,000 per year, and the difference was roughly $60,000 for some schools ranked near the bottom of the top 20. Is it possible that the financial returns from an MBA earned at a lower ranked school may actually exceed the returns from a top ranked school?

Accepted Answer

The financial returns of an MBA earned at a lower ranked school may exceed the returns from a top ranked school if the tuition is low enough. The net present value of the degree will be higher if the tuition is lower, making it possible for a lower ranked school to provide higher financial gains. However, this does not depend on the discount rate but rather the cost of the degree. Therefore, option B is incorrect. Option C is too general of a statement and ignores the fact that some lower ranked schools may provide higher financial gains. There is enough information provided in the passage to answer the question, making option D incorrect as well.

Question 12

Relative to a perfectly competitive market for an exhaustible resource, the monopolist charges a ________ price and uses the resource more ________.

Accepted Answer

A monopolist has the ability to set a higher price compared to a perfectly competitive market as they have control over the supply of the exhaustible resource. The monopolist is likely to use the resource more slowly as they have an incentive to prolong the use of the resource in order to maintain control over pricing and maximize profits in the long run.

Question 13

You are the owner of a rare bottle of wine valued at $332. There are no costs associated with storing or selling the wine. Next year you expect the wine to increase in value to $350. If the interest rate is 10 percent:

Accepted Answer

The future value of the wine is $350, but if you sell the wine today for $332 and invest that amount at a 10% interest rate, you would have $332 * 1.10 = $365.20 at the end of the year, which is more than the expected future value of the wine. Therefore, it is financially better to sell the wine today.

Question 14

According to the economics of exhaustible resources, if the interest rate increases,

Accepted Answer

When interest rates increase, the cost of borrowing money increases, which means that firms will be less likely to invest in long-term projects like developing new sources of exhaustible resources. This will result in an increased use of existing resources, causing them to be depleted sooner. Therefore, choice A is the best answer.

Question 15

As the stock of a depletable resource falls, its user cost:

Accepted Answer

User cost is the opportunity cost of using a resource instead of leaving it for future generations. As the stock of a depletable resource falls, the user cost increases because it becomes more expensive to extract the remaining resources, and there is less for future generations to use.

Question 16

Suppose new oil reserves are discovered that were not previously known. What happens to the user cost of oil?

Accepted Answer

The user cost of oil decreases as new reserves are discovered because the supply of oil increases, leading to a decrease in commodity prices. This, in turn, reduces the user cost of oil.

Question 17

What is the "Hotelling rule" for a monopolist?

Accepted Answer

The Hotelling rule for a monopolist states that the difference between marginal revenue and marginal cost should rise at the rate of interest, ensuring that the monopolist maximizes the present value of profits over time.

Question 18

What is the "Hotelling rule" for situations in which a producer can determine when a good is sold?

Accepted Answer

The Hotelling rule states that in a situation where a producer can determine when a good is sold, the optimal rate of depletion of a non-renewable resource is such that the price minus marginal cost must rise at exactly the rate of interest. This ensures that the producer can earn the maximum profit while also taking into account the opportunity cost of not investing the profits elsewhere. Therefore, option C is the correct choice.

Question 19

Why does the NPV of a college education tend to be positive but relatively small?

Accepted Answer

The answer of Why does the NPV of a college...

Question 20

Scenario 15.7:
Consider the following information:
You move to northern California and buy a winery that already holds a stock of some wine in barrels. You are deciding whether to sell the wine now, or keep it until next year. The current price of wine is $20 per bottle, and it costs $2 per bottle to get the wine from barrels to bottles.
-Based on the information in Scenario 15.7. You should:

Accepted Answer