1. A dam is proposed on a stretch of wild river, a river that is currently used for recre- ation. The dam will generate electricity. The dam will have a useful life of 50 years, after which its reservoir will be full of sediment and the dam will need to be removed. The following are characteristics of the dam: Initial Cost: $100,000,000 odb Electricity produced: 100,000 MWh per year, @ $100/Mwh. Cost of decommissioning dam: $10,000,000. Value of recreation lost: $5,000,000 per year a. If the social discount rate is 3% per year, is the dam a good idea? b. If the social discount rate is 10% per year, is the dam a good idea? 192 C. Calculate the "cutoff" discount rate, c, such that the dam is a good idea for dis- count rates c. 2. You are the mayor of the small town of Wasilla and a landowner has offered to sell you 1,000 hectares of woodland for $2,000,000. You are very tempted because of the
1. A dam is proposed on a stretch of wild river, a river that is currently used for recre- ation. The dam will generate electricity. The dam will have a useful life of 50 years, after which its reservoir will be full of sediment and the dam will need to be removed. The following are characteristics of the dam: Initial Cost: $100,000,000 odb Electricity produced: 100,000 MWh per year, @ $100/Mwh. Cost of decommissioning dam: $10,000,000. Value of recreation lost: $5,000,000 per year a. If the social discount rate is 3% per year, is the dam a good idea? b. If the social discount rate is 10% per year, is the dam a good idea? 192 C. Calculate the "cutoff" discount rate, c, such that the dam is a good idea for dis- count rates c. 2. You are the mayor of the small town of Wasilla and a landowner has offered to sell you 1,000 hectares of woodland for $2,000,000. You are very tempted because of the
Chapter1: Making Economics Decisions
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Transcribed Image Text:1. A dam is proposed on a stretch of wild river, a river that is currently used for recre-
ation. The dam will generate electricity. The dam will have a useful life of 50 years,
after which its reservoir will be full of sediment and the dam will need to be removed.
The following are characteristics of the dam:
Initial Cost: $100,000,000
odb
Electricity produced: 100,000 MWh per year, @ $100/Mwh.
Cost of decommissioning dam: $10,000,000.
Value of recreation lost: $5,000,000 per year
a.
If the social discount rate is 3% per year, is the dam a good idea?
b.
If the social discount rate is 10% per year, is the dam a good idea?
192 C.
Calculate the "cutoff" discount rate, c, such that the dam is a good idea for dis-
count rates<c and a bad idea for discount rates > c.
2. You are the mayor of the small town of Wasilla and a landowner has offered to sell
you 1,000 hectares of woodland for $2,000,000. You are very tempted because of the
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