Question 1

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

To determine the present value of the profit from each year of extraction, we need to discount the future profits to their present value based on the current market rate of interest. Using the formula for present value of a single sum, we have:

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 years.

For each year of extraction, we can calculate the present value of the profit as follows:

PV(today) = $40 / (1 + 0.06)^0 = $40
PV(in one year) = $55 / (1 + 0.06)^1 = $51.89
PV(in two years) = $57 / (1 + 0.06)^2 = $51.09
PV(in three years) = $60 / (1 + 0.06)^3 = $51.65

Therefore, the farmer should extract the natural gas in one year when the present value of the profit is highest ($51.89 per unit).

Question 2

An example of a renewable resource would be

Accepted Answer

Aquifers are a renewable resource because they are replenished naturally through the water cycle. As rainwater and snowmelt seep into the ground, they fill up underground layers of permeable rock and soil, which can then be pumped up for human use. While aquifers can be overused and depleted if not managed carefully, they are still replenished over time, unlike finite resources like oil, coal, and iron ore.

Question 3

Negative externalities from energy production should be considered when comparing the cost of an energy source, because they

Accepted Answer

Negative externalities, such as air pollution or environmental degradation, are costs incurred by society as a whole rather than the energy producer. These costs are not reflected in the market price of the energy source and must be considered when comparing the true cost of different energy sources. Therefore, these externalities are an additional cost of using that source.

Question 4

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 is 4 percent.The present value of this cost is about

Accepted Answer

The answer of An electricity company has the opportunity to...

Question 5

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 future extraction is

Accepted Answer

The present value of the future extraction can be calculated using the formula: Present value = Future value / (1 + interest rate)^number of years.

Since the mining company has the opportunity to extract the coal this year, the number of years is 0. Therefore, the present value of the future extraction is:

Present value = $40 / (1 + 0.05)^0 = $40 / 1 = $40

Therefore, the best choice is C, as it is the only option that correctly represents the present value of the future extraction.

Question 6

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

The present value of $60 today is higher than the present value of future profits when discounted at 7%.

Question 7

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 is 5 percent.Should the company make the investment?

Accepted Answer

The answer of An electricity company is considering damming a...

Question 8

About what minimum price per barrel of oil is necessary for biodiesel to become economically viable as an alternative energy source?

Accepted Answer

The answer of About what minimum price per barrel of...

Question 9

Which of the following factors fosters the survival of alternative-energy companies?

Accepted Answer

Government subsidies for alternative energy can help offset the higher production costs and make alternative energy more competitive with conventional energy sources.

Question 10

The primary focus of natural resource economics is to develop policies for harvesting or extracting natural resources that

Accepted Answer

The primary focus of natural resource economics is to maximize the net benefits of harvesting or extracting natural resources. This involves considering both the economic benefits of resource extraction as well as any negative environmental or social impacts that may result. By maximizing the net benefits, natural resource economics aims to create sustainable policies that balance economic growth with environmental and social responsibility.

Question 11

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 answer of A logging company is considering logging an...

Question 12

If predictions that the world will run out of oil or petroleum in the next century become true, then

Accepted Answer

If the world runs out of oil, alternative sources of energy such as solar, wind or nuclear power would likely become more viable and necessary. While economies may be impacted, it is unlikely that they would grind to a complete halt as alternatives are already being researched and implemented. Similarly, population decline due to starvation is unlikely as oil is not directly tied to food production.

Question 13

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

Accepted Answer

An increase in interest rates will lower the present value of a future amount. This is because the higher interest rate will provide a higher return on invested funds, making future amounts worth less in today's dollars.

Question 14

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 answer of An oil producer discovers an oil supply...

Question 15

An example of a nonrenewable resource would be

Accepted Answer

Gold ore is a nonrenewable resource because once it is mined and used, it cannot be replaced or replenished. Forests and oceans are renewable resources because they can be regrown and replenished over time. Solar energy is a renewable resource because it is constantly replenished by the sun.

Question 16

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 lower discount rate reduces the cost of waiting for the future payment. As a result, the present value of the future payment increases, since the future amount is discounted back to the present at a lower rate. Vice versa, an increase in interest rates lowers the present value of a future amount.

Question 17

Because wind turbines supply no energy on windless days, and solar power is only generated when the sun is up and out, one inherent problem with both wind and solar power is the

Accepted Answer

The inherent problem with both wind and solar power is the energy storage problem. As they only generate power intermittently, there is a need for reliable and cost-effective energy storage systems to store excess energy generated during peak times and supply the energy during low times.

Question 18

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 of the future extraction can be calculated using the formula: PV = FV/(1+i)^n, where PV is the present value, FV is the future value, i is the interest rate, and n is the number of years. 
In this case, FV is the profit per barrel which is $70, i is 4%, and n is 3 years. So, PV = 70/(1+0.04)^3 = $62. Therefore, the present value of the future extraction is about $62. Thus, the best choice is option B.

Question 19

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

Accepted Answer

In order to manage both renewable and nonrenewable resources optimally, it is important to consider the net benefits of current use as well as future use. This means that incentive structures should weigh the costs and benefits of using the resource now versus preserving it for later use, ultimately maximizing the overall benefits over time. Simply reducing production costs or increasing the benefits from production may not account for the long-term effects on the resource and its sustainability.

Question 20

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 rate is 10 percent.Should the company make the investment?

Accepted Answer

To determine whether the investment is worthwhile, we need to compare the present value of the expected profit to the present value of the cost. We can use the formula:

PV = FV / (1 + r)^n

where PV is the present value, FV is the future value, r is the discount rate, and n is the number of periods.

In this case, the cost is $300,000, which is the present value. The expected profit in three years is $500,000, but we need to discount it back to its present value using the market rate of 10 percent. Using the formula:

PV = $500,000 / (1 + 0.10)^3 = $383,542.16

Since the present value of the profit ($383,542.16) is greater than the present value of the cost ($300,000), it is worthwhile for the oil company to make the investment. Therefore, the answer is C.

Quiz 19: Natural Resource and Energy Economics