Question 1

In time-value of money analysis, an increase in interest rates

Accepted Answer

An increase in interest rates lowers the present value of a future amount because a higher discount rate is used to calculate the present value, making the future amount worth less in today's terms.

Question 2

An energy company has recently discovered a natural gas reserve. The company can tap this reserve at a cost of $350,000 and obtain a profit of $450,000 in three years. The current market rate is 15 percent. Should the company make the investment?

Accepted Answer

The answer of An energy company has recently discovered a...

Question 3

A farmer discovers a natural gas reserve on his property. He can extract the natural gas for a profit of $40 per unit now, $55 per unit in one year, $57 per unit in two years, and $60 in three years. The current market rate of interest is 6 percent. When should the farmer extract the natural gas to obtain the most profit per unit in present value terms?

Accepted Answer

The answer of A farmer discovers a natural gas reserve...

Question 4

The key to optimally managing renewable and nonrenewable resources is to design incentive structures that

Accepted Answer

The optimal management of renewable and nonrenewable resources involves balancing the benefits of current use against the benefits of preserving resources for future use, which is best described by option C. This approach ensures sustainability and long-term resource availability.

Question 5

A mining company's extraction costs curve is

Accepted Answer

The extraction costs curve is typically upward-sloping because as a company extracts more resources, it often has to access more difficult and expensive sources, leading to increased marginal extraction costs.

Question 6

An electricity company has the opportunity to use natural gas to generate electricity at a cost of $30 per unit in 2 years. The current market rate of interest is 4 percent. The present value of this cost is about

Accepted Answer

The present value of a future cost or investment can be calculated using the formula PV = FV / (1 + r)^n, where PV is the present value, FV is the future value, r is the interest rate, and n is the number of periods. Plugging in the given values: PV = $30 / (1 + 0.04)^2 = $30 / 1.0816 ≈ $27.73, which rounds to about $28.

Question 7

An oil company has the opportunity to extract oil from a reserve in three years with a per barrel profit of $70 per barrel. The current market rate of interest is 4 percent. The present value of this future extraction is about

Accepted Answer

The present value (PV) of the future extraction can be calculated using the formula PV = FV / (1 + r)^n, where FV is the future value ($70), r is the interest rate (0.04), and n is the number of years (3). Plugging in the values gives PV = $70 / (1 + 0.04)^3 ≈ $62.

Question 8

An oil producer discovers an oil supply in Texas that can be pumped for a profit of $50 per barrel now, $60 per barrel in three years, $80 per barrel in five years, or $90 a barrel in seven years. The current market rate of interest is 3 percent. When should the oil producer extract the oil to obtain the most profit per barrel in present value terms?

Accepted Answer

The present value of future profits is calculated by discounting future profits at the current interest rate. The present value of $90 in seven years at a 3% interest rate is higher than the present value of profits at other times, making it the most profitable option.

Question 9

An example of a nonrenewable resource would be

Accepted Answer

Gold ore is a nonrenewable resource because it cannot be replenished on a human timescale once it is extracted from the earth.

Question 10

A logging company is considering logging an area for a current cost of $500 per acre to obtain a profit the next year of $600 per acre. The market rate of interest is 10 percent. Should the company make the investment?

Accepted Answer

The present value of the profit ($600) discounted at the market rate of interest (10%) for one year is $545.45 ($600 / (1 + 0.10)), which is greater than the current cost of $500 per acre. Therefore, the investment is financially viable.

Question 11

An oil company is considering drilling in the Gulf at a current cost of $300,000 with an expected profit of $500,000 in three years. The current market rateof interest is 10 percent. Should the company make the investment?

Accepted Answer

The present value of the profit, discounted at the market rate of interest, is greater than the current cost of the investment, making it a financially sound decision.

Question 12

The graph shows the extraction costs for TX Oil Company in the first year in a situation where it will extract oil from a reserve over two years. If the current market price is $60 and user costs are not considered, the extraction quantity is

Accepted Answer

The answer of  The graph shows the extraction costs...

Question 13

An electricity company is considering damming a small river to generate electricity at a cost of $160,000 and a profit of $200,000 in 5 years. The current market rate of interest is 5 percent. Should the company make the investment?

Accepted Answer

The present value of the profit ($200,000) discounted at 5% over 5 years is less than the initial cost of $160,000, making the investment unwise.

Question 14

The user cost of nonrenewable resources is

Accepted Answer

The user cost of nonrenewable resources is considered the opportunity cost of extracting and selling the resource today instead of in the future. This reflects the lost future value or benefits that could have been obtained by keeping the resource in the ground and using it later when it might be more valuable or scarce.

Question 15

In time-value of money analysis, a decrease in interest rates

Accepted Answer

A decrease in interest rates raises the present value of a future amount because the discount rate used to calculate the present value is lower, resulting in a higher present value.

Question 16

The use of present value calculations in valuing natural resources is important because it

Accepted Answer

Present value calculations help in determining the value of future cash flows in today's terms, ensuring that resources are used where they yield the highest value over time, thus leading to optimal allocation.

Question 17

A Middle Eastern country has an oil reserve that it can extract for a profit of $60 a barrel today, $65 a barrel in two years, $70 a barrel in three years, and $75 in four years. The current market rate of interest is 7 percent. When should this country tap into its oil reserve to obtain the most profit per barrel in present value terms?

Accepted Answer

To determine the most profit per barrel in present value terms, we calculate the present value (PV) of the profits for each option using the formula PV = FV / (1 + r)^n, where FV is the future value, r is the interest rate, and n is the number of years. Calculating for each option: - Today: $60 (no need to discount) - In two years: $65 / (1 + 0.07)^2 ≈ $56.76 - In three years: $70 / (1 + 0.07)^3 ≈ $56.99 - In four years: $75 / (1 + 0.07)^4 ≈ $57.31 Among these, $60 today has the highest present value, making it the most profitable option.

Question 18

A mining company has the opportunity to extract from a coal reserve this year for a profit of $40 per pound. The current market rate of interest is 5 percent. The present value of this extraction is

Accepted Answer

The present value of the extraction is the current profit per pound, which is $40, as it is being extracted this year and not in the future.

Question 19

An example of a renewable resource would be

Accepted Answer

Wildlife is considered a renewable resource because it can reproduce and replenish its population over time, unlike oil, coal, and iron ore, which are non-renewable resources that do not naturally replenish on a human timescale.

Question 20

At any level of a mining firm's output, total cost will be equal to extraction costs

Accepted Answer

Total cost in mining includes both extraction costs and user costs. User costs represent the opportunity cost of depleting a natural resource, and they are added to extraction costs to get the total cost.

Quiz 19: Natural Resource and Energy Economics