Phil Graves Environmental Economics for Non-majors University of Colorado

Fall, 2004 EC3545 Second Midterm, Ver. A

Select the best answer, after reading all possible responses.

1). Which of the following is true of population growth in the last half of the twentieth century?

a. Population growth accelerated since 1970.

b. Population growth decelerated since 1970.

c. Population growth, 1950-2000, was faster than for any other 50-year period.

d. Both a and c are correct.

e. Both b and c are correct.

2). Why would population continue to grow for several decades after a population reaches a replacement-level fertility?

a. because of the high level of fertility.

b. because of the high level of mortality.

c. because of the old population.

d. because of the young population.

3). The reasons for the change in developing-country population growth from the first half of the twentieth century to the last half of the twentieth century are

a. birth rate falling faster than the death rate.

b. a death rate falling faster than the birth rate.

c. a death rate rising while the birth rate falls.

d. a death rate rising while the birth rate remains constant.

e. a death rate rising while the birth rate rises.

4). Which of the following discount (interest) rates, when employed in environmental decisionmaking, is more likely to result in species extinction?

a. a high discount rate.

b. a low discount rate.

c. a negative discount rate.

d. a zero discount rate.

5). The city government of Boulder wishes to minimize the social cost associated with factories’ emission of suspended particulate matter. What decision making rule should the city government of Boulder use?

a. Put into place polices to continue to reduce pollution emissions by one ton per year until the average reduction in the dollar damages from these emissions equals the average increase in abatement costs.

b. Put into place polices to continue to reduce pollution emissions by one ton per year until the marginal reduction in the dollar damages from these emissions equals the marginal increase in abatement costs.

c. Put into place polices to continue to reduce pollution emissions by one ton per year until the marginal reduction in the dollar damages from these emissions exceeds the marginal increase in abatement costs by the maximum amount.

d. Put into place polices to continue to reduce pollution emissions by one ton per year until the marginal reduction in the dollar damages from these emissions falls below the marginal increase in abatement costs by the maximum amount.

e. Put into place polices to continue to reduce pollution emissions by one ton per year until the total dollar damages from these emissions equals the total abatement costs.

6). Which of the following is true with regards to cancer in the United States:

a. Cancer rates have increased at an alarming rate

b. Pesticides and fertilizers are the cause of most cancers

c. Some of the largest decreases in cancer rates occurred during the 1990’s

d. Toxic control programs are one of the most cost effective ways to save lives

7). We are trying to decide between two similar projects:

a. The one that pays back its cost quickest should be selected

b. The one with benefits most in excess of cost should be selected

c. Cost and benefits should not be considered in deciding between projects

d. The one with the highest benefit/cost ratio should be selected

8). Which of the following is a true statement regarding benefit-cost analysis?

a. Benefit-cost analysis weights the preferences of each individual according to willingness-to-pay; hence everyone does not have an "equal say."

b. Project A has a B/C ratio of 2.5, while Project B has a B/C ratio of 1.7. On efficiency grounds, Project A must always be preferred to Project B.

c. Benefit-cost analysis can, on efficiency grounds, conclude that a project is efficient, but that project could still be collectively viewed as making society worse off.

d. Both a. and c. are true.

e. All of the above are true.

9). Which of the following is false about interest rates?

a. The interest rate is the opportunity cost of current consumption in terms of foregone future consumption.

b. Increases in the number of productive investment opportunities would result in lower interest rates.

c. Decreases in household saving (thrift) would result in lower interest rates.

d. Both b. and c. are false.

e. All of the above are false.

10). We talked in class about four methods of making decisions that involve known benefits and costs occurring over many future periods. Which method was not among those discussed?

a. Net present value.

b. Benefit/cost ratios.

c. Internal rate of return.

d. External rate of return.

e. Payback period.

11). The method of decisionmaking for projects extending over many time periods that was argued in class to be the most generally undesirable was:

a. Net present value.

b. Benefit/cost ratios.

c. Internal rate of return.

d. External rate of return.

e. Payback period.

12). Which of the following is a true statement?

a. Benefit/cost analysis and net present value will always give the same rankings for projects in terms of efficiency.

b. Internal rate of return and net present value will always give the same rankings for projects in terms of efficiency.

c. Payback period analysis requires less information than net present value.

d. Net present value, benefit/cost analysis, and internal rate of return all require the same information, yet only net present value always ranks projects correctly in    terms of efficiency.

e. Both c. and d. are true.

13). At a 10% interest rate, a dollar received in two years is worth approximately what now?

a. $1.21

b. $1.10

c. $1.00 exactly.

d. $.91

e. $.83

14). The following projects are mutually exclusive, in that having any one precludes having the others. Given the information presented (PVC is "present value of costs" and NPV is "net present value"), which project would you prefer, on efficiency grounds?

a. Project A PVC = $1 million NPV = +$600,000

b. Project B PVC = $3 million NPV = +$300,000

c. Project C PVC = $4 million NPV = +$400,000

d. Project D PVC = $10 million NPV = +$700,000

e. Projects B and C above are the preferred projects and are equally good.

15). Providing ordinary private goods (say broccoli) at the socially optimal levels, relative to other provision levels, results in:

a. Maximum net present value.

b. Maximum benefit/cost ratio.

c. Maximum internal rate of return.

d. All of the above.

e. None of the above are true.

16). On equity grounds,

a. Projects with negative net present values can be desirable.

b. Projects with positive net present values can be undesirable.

c. Projects with positive net present values can be desirable.

d. Only a. and b. are true.

e. All of the a., b., and c. are true.

17). The Internal Rate of Return formula as a method of project analysis:

a. uses the opportunity cost of funds as the discount rate in its formula.

b. solves for the interest rate that makes the net present value of benefits and costs from a project equal to zero.

c. results in ambiguity in some cases since there will generally be more than one internal rate of return solving its formula.

d. is preferred to net present value for business projects but not for environmental projects.

e. both b. and c. are true.

18). It is possible, using the Payback Period method, to rank Project A above Project B even though:

a. Project B is preferred on efficiency grounds.

b. Project A has a negative net present value.

c. Project A has an internal rate of return below the opportunity cost of the funds.

d. Project A has a benefit/cost ratio less than 1.

e. All of the above are possible.

19). A bond was originally sold for $1,000. It has a coupon yield of $100/year forever. At a current interest rate of 5%, what would this bond sell for?

a. $500

b. $1,000

c. $1,500

d. $2,000

e. Impossible to determine with given information.

20). If interest rates rise, bond prices

a. fall.

b. rise.

c. remain unchanged, since the bond and money markets are unrelated.

d. may rise or fall, depending on circumstances.

e. None of the above are always true.

21). Ackerman and Heinzerling argue in Priceless that

a. Environmental projects should be undertaken only when total benefits exceed total costs by a substantial amount.

b. Environmental projects should be undertaken only when marginal benefits equal marginal costs.

c. Environmental projects should not be subject to benefit-cost analysis for the same reason that defense projects are not tested in this manner.

d. All of the above.

e. None of the above.

22). Benefit-cost analysis is just a fancy way of, in Ben Franklin's words, comparing the "pros" and "cons" of a course of action and

a. taking the action if the ratio of pros to cons seems to be greater than 1.

b. taking the action if the pros minus the cons seems to be positive.

c. taking the action if the pros are sufficiently important, regardless of the size of the cons.

d. taking the action if the pros and cons are distributed fairly among people.

e. None of the above characterizes Franklin's approach.

23). Benefit-cost analysis deals with benefits and costs regardless of who receives or pays, respectively. This implies that

a. we can never know that any project, even one with benefits greater than costs, will raise social welfare.

b. we need not look at the equity impacts of a policy.

c. we would need to be confident that no group is systematically discriminated against to have confidence in benefit-cost analysis.

d. the winners can never compensate the losers, because doing so will always result in everyone being worse off.

e. only a. and c. are true.

24). Lomborg argues in Part III of The Skeptical Environmentalist that

a. human progress has been substantial to date, but that we are "living on borrowed time," since our progress is not sustainable.

b. forests are in a dramatic state of decline, particularly the temporate forests.

c. we are running out of non-energy resources at a much more rapid rate than we are running out of energy resources.

d. future generations are likely to have more resource options, rather than fewer resource options.

e. All of the above.

25). In Part IV of The Skeptical Environmentalist Lomborg discusses pollution. Which of the following is not an argument that Lomborg makes?

a. economic growth and environmental quality go hand-in-hand.

b. new technology is enabling lower environmental damages from a given GDP level over time.

c. asthma rates have been declining over time in the U.S. and most of the developed world.

d. indoor air pollution poses a greater health risk than outdoor air pollution.

e. All of the above are argued to be true, according to Lomborg.

ANSWERS