ECON 456 San Diego State University Abman Fall 2020 ✓ Solved

ECON 456 San Diego State University Abman Fall 2020 Econ 456 -

1. Suppose you are in charge of a forestry operation in the Pacific Northwest. Trees on your property grow according to the table below (which relates time to timber volume). This type of timber sells for $2 per board foot in the market, clearing your land will cost you $450 (regardless of the volume when you clear) and your land is worth $850 when cleared. The market interest rate is 12%.

(a) What is the optimal (profit maximizing) year to cut your trees? What is the present value of the profits earned in that year?

(b) Find the rotation age that maximizes average annual yield (tMSY).

(c) Suppose a developer offered you $1,500 for your land today (with the trees on it). Should you sell your land or keep it, and harvest timber at the optimal time, and sell your land for the $850 it is worth after the rotation?

(d) Suppose a local mountain biking association offered to pay you an annual amount to keep the trees standing on your land (because they like mountain biking on trails with the trees). What is the minimum amount they would offer you to choose to delay your harvest until year 5, rather than the year you found in part (a)?

2. Suppose a rockfish fishery is characterized by the following equations for sustainable yield (SY) and total cost (TC): SY = 60E − 3E², TC = 9E. The market price for one ton of rockfish is $3.

(a) Find the level of effort that produces the maximum sustainable yield (EMSY).

(b) Find the efficient level of effort for the fishery (E*).

(c) Find the open-access equilibrium for the fishery (EOA).

(d) Graph the sustainable revenue curve and the total cost curve. Identify all points listed in parts (a) - (c).

(e) Find the maximum annual resource rent possible in the rockfish fishery.

(f) Suppose the fishery is currently open access. Regulators are worried that the current fishery is poorly managed and thus propose that nets may no longer be used to fish and all fishing must be done via longline fishing. This technique is more costly to fishermen and now doubles the cost of a unit of effort (such that it is now $18 rather than $9). What is the effect of this new regulation? What would we expect the new equilibrium effort level to be? Is this policy efficient? Why or why not?

3. Suppose the Pacific sablefish fishery is characterized by the following equations for sustainable yield (SY) and total cost (TC): SY = 100E − 2E², TC = 12E. The market price for one ton of sablefish is $2.

(a) Find the level of effort that produces the maximum sustainable yield (EMSY).

(b) Find the efficient level of effort for the fishery (E*) and the total rents under this level of effort.

(c) Find the open-access equilibrium for the fishery (EOA).

(d) Suppose lower gas prices make it cheaper for fishermen to power their boats. The new lower gas prices drop the cost of a unit of effort to $4 (down from $12). What would be the new open-access equilibrium level of effort? Would fishermen be better off under this new equilibrium rather than the equilibrium found in part (c) with the higher effort cost? What would be the new efficient level of effort for the fishery? If the efficient level of effort could be enforced, how much more rent would there be relative to the potential rent from part (b)?

4. Two halibut fishermen each receive a certain share of the total allowable catch (TAC) at the beginning of the fishing season. These two fishermen differ by experience; the fisherman with the high level of experience has a lower marginal cost than the fisherman with the low experience.

The low marginal cost fisherman (denoted L) has a marginal cost of catching fish of 2q and the high marginal cost fisherman (denoted H) has a marginal cost of catching fish of 5q where q refers to tons of halibut. The market price for halibut is $500 per ton.

(a) Suppose the regulator were to issue 50 permits to each fisherman for the season and they cannot trade the permits. What will the total profits from the halibut fishery be this year under this allocation?

(b) If the regulator had information regarding the marginal cost of each fisherman, how many permits would she issue each of the fishermen in order to maximize total profits from the halibut fishery this year? What are the total profits from this optimal allocation? Why do they differ from the profits in the allocation described in part (a)?

(c) Suppose 50 permits were allocated to each fisherman, but they can trade permits amongst each other. How many would each of them end up with after this bargaining has taken place? How much would fisherman L be willing to pay for the additional permits (those he buys beyond the 50 permits he is allocated)? How much would fisherman H be willing to accept to sell these permits?

Review. Read the presentation carefully and thoroughly. Compose a brief, word review of the Unit Assignment. This should ideally discuss the content of the assignment, the presentation of the information, whether or not it was conveyed clearly, and your suggestions for improvements.

1. Do you understand what the point of their assignment was? Was it clear what they were trying to communicate?

2. What would have helped to communicate their points more clearly? Alternatively, what did they do that helped you most to understand what they were trying to get across?

Paper For Above Instructions

The forestry operation in the Pacific Northwest requires astute management to maximize profits and sustainability. The optimal year to cut trees depends on evaluating present value calculations of future profits. Using a market price of $2 per board foot for timber and a clearance cost of $450 with the land worth $850 post-rotation, we can ascertain the optimal cutting age based on maximizing net present value (NPV).

For the first part, we calculate the profits from different years and determine the year with the highest NPV. The present value (PV) formula requires discounting future cash flows based on the market interest rate of 12%. This requires calculating profits for each year by multiplying the timber volume with market prices and subtracting clearance costs and opportunity costs. Ideally, the optimal year is the one that maximizes the NPV, factoring in all costs and revenues.

Secondly, the highest average annual yield (tMSY) fundamentally incorporates both sustainable forestry practices and profit maximization. This requires identifying the age at which the total volume divided by the number of years results in maximum output. The challenges stem from balancing ecological impacts and financial incentives while ensuring reforestation and land value retention over time.

Regarding the land offer from a developer, a comparison of immediate monetary gain to projected future profits necessitates extensive analyses. By juxtaposing the $1,500 offer against the possibility of future revenues achieved by optimal cutting followed by selling cleared land for $850, a decision must be reached through NPV evaluations across scenarios. It leads to a critical decision regarding resource management aligned with personal financial goals.

In the context of the mountain biking association, understanding the minimum annual value that would incentivize delaying harvest until year 5 allows for negotiations grounded in environmental and economic strategies. This figure will hinge upon maintaining the viability of timber production against potential income generated through preserved natural landscapes.”

Moving on to the rockfish fishery, the sustainable yield and total cost equations determine the equilibrium levels of effort to maximize profits while maintaining ecological balance. Calculating EMSY involves deriving the first derivative of the sustainable yield function and equating it to zero, yielding insights into optimal fishing endeavors.

Next, the efficiency in this context is juxtaposed against the open access scenario. The regulatory environment significantly impacts effort levels. By analyzing cost per effort, sustainability decreases under open-access systems, thus emphasizing the need for management tactics that enforce sustainability while maximizing economic rent.

Likewise, in the sablefish fishery, the analysis encapsulates economic calculus concerning effort levels, costs, and returns under variable gas prices. When operating costs decrease due to favorable marketing conditions, the equilibrium shifts, underscoring the impact of environmental and market conditions on economic valuations and decisions relating to fish stocks.

Finally, in discussing the halibut permits scenario, we must consider how to allocate permits optimally based on marginal costs for each fisher. Diving into efficiency and profit maximization based on experience demonstrates the interplay of market mechanisms and regulatory frameworks. It becomes essential to acknowledge the implications of permit trade and its effect on overall profits and sustainable outcomes.

Through the presented reviews, one can ascertain the strengths and weaknesses in executing such assignments while providing insights that could improve clarity and engagement.

References

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