Economics of Energy Exercises

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Exercises I. Problems: 1. The worldwide consumption of petroleum was 150.8 quads in 2002. Assuming the consumption continues to increase at 2% per year, what will the world consumption of petroleum be in 2025? 2. A bacterial colony in a jar grows at the rate of 10% every hour. Find: a. Doubling time b. If the jar were initially 1/8 full, how long would it take before the jar is completely full? c. Assume that a person is accidentally infected with only one bacterium. What is the bacterial population after one week? 3. If an employer were to offer you a) $10,000 a year in initial salary and a $2,000 raise every year thereafter, or b) $1 a year in initial salary, but would double it every year for the next twenty years, which one would you choose? Why? Assume that the prevailing interest rate remains at around 5% for the 20 year period. 4. A loan agency has offered a customer to pay off his $ 100,000 existing loans using one of the following three options: a. By paying balance immediately in cash b. By paying 10 equal payments of $11,000 each annually. c. By paying $50,000 now and a balloon payment of $60,000 in 10 years. Which option makes more sense to the customer? Assume annual interest rate of 5%. 5. The national average price of regular gasoline in the United States is given by the DoE Energy Information Energy (all data are for August) as following: 1992 $1.03 a gallon 1994 $1.13 “ 1996 $1.17 “ 1998 $1.00 “ 2000 $1.45 “ 2002 $1.36 “ 2004 $1.85 “ 2006 $3.00 “ a. Adjust the prices for inflation, which year offered the cheapest gasoline? most expensive gasoline? b. What is the price of gasoline in today’s dollar? in 2000’s dollar? In 1950’s dollar? In 1900’s dollar? II. Multiple Choice Questions 1. In an efficient market a. There are numerous buyers and sellers b. There are no barriers to entry c. There are numerous products that are essentially indistinguishable from the good of interest d. Firms’ only goal is to maximize their profits e. All of the above 2. The supply curve is upward sloping because a. As prices increase, so do costs b. As prices increase, demand for a product declines c. As prices increase, demand for a product also rises d. As prices increase, suppliers are willing to produce more e. As prices increase, suppliers are willing to produce less 3. As the cost of production of cell phones falls, a. The demand curve for cell phones shifts to the left b. The demand curve for cell phones shifts to the right c. The supply curve for cell phones shifts to the left d. The supply curve for cell phones shifts to the right e. Neither the supply curve nor the demand curve shift 4. In a perfectly efficient market, a firm’s long-term profit will be maximized when a. Price equals fixed cost b. Price equals total cost c. Fixed cost equals total revenue d. Total cost equals total revenue e. Marginal cost equals marginal revenue 409 Chapter 15 - Economics of Energy 5. Which of the following is not consistent with the existence of a perfect competitive market? a. Absence of low transaction costs b. Limited competitors c. Significant barriers for entry into the market d. Absence of a sufficient number of indistinguishable substitutes e. All of the above 6. When a newer technology replaces an older technology a. Both demand and supply curves shift to the right b. Both demand and supply curves shift to the left c. Demand curve does not change, but the supply curve shifts to the right d. Supply curve does not change, but the demand curve shifts to the right e. Neither the demand curve, nor the supply curve are affected 7. When median income increases, a. Both demand and supply curves shift to the right b. Both demand and supply curves shift to the left c. Demand curve does not change, but the supply curve shifts upward d. Supply curve does not change, but the demand curve shifts upward e. Neither the demand curve, nor the supply curve are affected 8. Which of the following is considered to be a positive externality? a. A power plant emits pollution into the air thus reducing its cleanup cost. b. A man blasts his music and gives his neighbor a headache. c. A little girl buys a pretty doll from a toy store. d. A power plant switches from coal to natural gas. e. None of the above. 9. As a result of higher demand for a product a. The demand curve does not change, but price rises b. The demand curve does not change, but price falls c. The demand curve shifts to the right, but price rises d. The demand curve shifts to the right, but price falls e. Both price and quantity supplied increase 10. As a result of a rise in the cost of living, we expect a. Both price and quantity of goods to rise b. Price increases as quantity of goods falls c. Price does not change as quantity of goods falls d. Quantity of goods does not change as price increases e. Both price and quantity of goods increase 11. Exponential growth may be characterized by a. The absolute amount of growth every year remaining constant b. The percentage growth every year being constant c. The percentage growth every year being exponential d. The growth rate doubling every year e. None of the above 12. Linear growth may be characterized by a. The absolute amount of growth every year being constant b. The percentage growth every year being constant c. The percentage growth every year being exponential d. The growth rate doubling every year e. None of the above 13. According to the latest (2000) census results, Nevada showed the fastest population growth (5.4%) in the United States. In what year would the population of Nevada double? a. 2005 b. 2013 c. 2018 d. There is not enough information to predict the year. 410 e. None of the above. 14. In the US, the doubling time of our exponentially growing electricity consumption rate was 10 years from 1900 to 1970. How did the electricity consumption from 1960 to 1970 compare to all US electricity consumption prior to 1960? a. It was twice as much. b. It was half as much. c. It was an equal amount. d. It was 1/6 as much. e. It cannot be determined from given information. 15. Since the 2000 census, the US population has grown at a rate of 1.2% per year. In what year will the US population double? a. 2058 b. 2083 c. 2120 d. There is not enough information to predict the year. e. None of the above. 16. In 75 years, a small community of 10,000 people that enjoys a constant 2.8% annual growth rate will attain a population of about a. 28,000 b. 30,000 c. 80,000 d. 2,100,000 e. None of the above 17. An employer guarantees a salary increase of 7.2% a year for all employees. If a particular employee is hired at an initial annual salary of $30,000, how long would it take for their salary to reach $60,000? a. About 7 years b. A bit sooner than 10 years c. 10 years d. A bit longer than 10 years e. About 14 years 18. Statistics show that for the last few decades, the US consumption of petroleum has doubled every decade. The corresponding annual percent growth rate is a. 2% b. 7% c. 10% d. 13% e. None of the above 19. $200 invested at 5% compound interest will grow to $800 in about a. 4 years b. 28 years c. 40 years d. 42 years e. 56 years 20. What is the present worth of $1,000 payable in 5 years assuming an average discount rate of 4%? a. $ 820 b. $ 850 c. $ 1,000 d. $ 1,170 e. $ 1,220 21. How much interest does $1,000 placed in a 5-year CD paying 4% accumulate? a. $ 2,220 b. $ 1,220 c. $ 820 d. $ 220 e. None of the above 22. If a sin tax is imposed on tobacco and alcohol a. The demand curve shifts to the left b. The demand curve shifts to the right c. The supply curve shifts to the left d. The supply curve shifts to the right e. Neither the supply curve nor the demand curve shift 23. What happens to the price of air travel when the price of travel by rail increases? a. The demand curve shifts to the left. b. The demand curve shifts to the right. c. The supply curve shifts to the left. d. The supply curve shifts to the right. e. Neither the supply curve nor the demand curve shifts. 411 Chapter 15 - Economics of Energy 24. The social cost of a product or activity is the sum of a. Fixed and variable costs b. Private and variable costs c. Private and fixed costs d. Private and external costs e. Private and public costs 25. Firms often collude to form a cartel because a. They can function like a monopoly b. It allows them to spend more money on innovation c. It furthers competition and increases their market shares d. Cartels are more efficient e. All of the above 26. Net National Welfare (NNW) is defined as a. The total value of all goods and services produced in a country in a given calendar year b. The sum of all goods and services produced by labor and property located in a country irrespective of who supplies them c. The sum of all goods and services supplied by a country’s residents irrespective of where they are physically produced d. The total annual output of both market and non-market goods and services, and minus the cost of externalities and depreciation of natural and human-made capitals used up in production e. The total money spent on welfare agencies 27. The United States has a GDP in the order of a. 10 billion dollars b. 100 billion dollars c. 1 trillion dollars d. 10 trillion dollars e. 100 trillion dollars 28. The Gross National product (GNP) is defined as a. The total value of all goods and services produced in a country in a given calendar year b. GDP plus what domestic companies earn from activities abroad plus what foreign companies make from domestic activities in that country c. The sum of all market and non-market goods and services supplied by a country’s residents d. The sum of all goods and services produced by labor and property located in a country irrespective of who supplies them e. Another name for Gross Domestic Product 29. One example of an objection raised against globalization and free-trade is a. Richer countries can use their economic muscles to force poorer countries to accept their wastes b. Resource depletion is accelerated because richer countries can have unrestrained access to natural resources of poorer countries c. Richer countries can impose regulations that put them at an unfair advantage over underdeveloped and developing nations d. All of the above e. None of the above 30. The quantitative limitation placed by a government on an import is called a(n) a. Quota b. Tariff c. Embargo d. Import tax e. Excise tax III. True or False 1. There are two ways that demand can change: in price or in overall demand. 2. As price increases due to a shift in the demand curve, suppliers respond by reducing the supply. 3. As the cost of production of a product goes down, the price declines, causing the demand curve to shift to the right. 4. As the price of gasoline rises, the demand for automobiles shifts to the right 5. Along a standard demand curve, price and quantity are inversely related—when price rises, quantity demanded decreases and vice versa. 6. When there can be no change to quantity supplied 412 no matter the price, the supply curve is perfectly elastic. 7. When the price of air travel rises, the price of travel by rail increases also. This is because airline and rail travel are substitutes. 8. Externalities arise when private costs and social costs or benefits do not match. 9. Depending on their implications, some goods could have both positive and negative externalities. 10. Police protection is a prime example of a private good. 11. In the long run, no profit can be extracted in a perfectly competitive market. 12. When MB= MC, total net benefits are maximized. 13. The social benefit of a trade is the sum of the private benefit to buyer and seller and the external benefit to all other members of society. 14. International trade facilitates the transfer of technology from industrial to developing nations. 15. During off-tourist seasons there will be an increase in equilibrium price along with a decrease in quantity sold. IV. Fill in the Blanks 1. As the cost of production of a product goes down, the price to the customer declines, making it more affordable. This results in a shift along the ___________ curve. 2. __________ is the money that must be paid to buy a product. _________, on the other hand, refers to the foregone value of resources that are used to make a product. 3. When a price ceiling is imposed below the equilibrium price, a ____________ results. 4. In a competitive market, surplus occurs if the price is set __________ the equilibrium price. 5. A monopoly is inherently _________ efficient than a competitive market. V. Project - Power Plant Finances It is estimated that a nuclear power plant will cost $3 billion to build. The utility needs to raise $2.4 B for the plant construction and equipment. The money is needed over a 5 year period ($480 M each year for 5 years) which is how long it takes the plant to be built. There are three options available: a. Borrow the total sum at the beginning of year 1 at a rate of 8%. The excess money, will be invested in the stock market, where an historic average of 5% has been returned. b. Borrow money from the bank as needed, i.e. $480 million at the beginning of year 1, 2, 3, 4, and 5. The bank charges 7% per year interest. c. Borrow the money monthly at the prime rate, i.e. borrow $8 M for 60 months. The prime rate at the beginning of the year 1 is 4%, but is expected to raise by 1.5% every year for the next 5 years. At the end of year 5, the plant is operational and the utility will be able to make a monthly payment of $5 million until all of the loan is paid off. Find: 1. What is the net present worth of the three options proposed above? Which option is economically more viable? 2. What is the effective interest rate of all future payments? 3. Redo the problem if a 3% cost of living adjustment is considered. 4. How many months does it take for all loans to be paid off? 5. What is the cumulative value of all payments for the option considered?