Question #1: Consider a forest with 610,000 tons of standing timber and a growth rate of 55,000 tons of additional biomass per year. Assume the price of timber is $115 per ton and a discount rate of 6%. What is the value of the forest if it is clear cut? Show and explain your work.What would be the value of the timber under a sustainable yield management approach? Show and explain your work.Given the interest rate of 6%, which management strategy would you recommend to maximize the present value of this forest? Show and explain your work.How would your answer change if the interest rate was 10%? Show and explain your work.In class we developed a “marginal benefit of harvesting” and “marginal cost of harvesting” equation and diagram to establish a principle for optimal harvest rotation. Use this diagram to explain what is happening to the optimal harvest rotation in this scenario when the interest rate increases from 8% to 10%. (You do not need to use actual numbers—just reflect the change in the diagram and provide an explanation.)Consider the optimal harvest rotation model. Use the model to show what would happen to the optimal harvest rotation if the stand of timber was found to be habitat for an endangered and protected species. Thoroughly explain, with examples, the effects of social cost considerations on the optimal timing of harvest.Research, describe, and comment on some policy options available to help address the social cost of deforestation.

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Microeconomics: Private and Public Choice (MindTap Course List)

16th Edition

ISBN:9781305506893

Author:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson

Publisher:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson

Chapter14: Investment, The Capital Market, And The Wealth Of Nations

Section: Chapter Questions

Problem 13CQ

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Question #1: Consider a forest with 610,000 tons of standing timber and a growth rate of 55,000 tons of additional biomass per year. Assume the price of timber is $115 per ton and a discount rate of 6%.

What is the value of the forest if it is clear cut? Show and explain your work.
What would be the value of the timber under a sustainable yield management approach? Show and explain your work.
Given the interest rate of 6%, which management strategy would you recommend to maximize the present value of this forest? Show and explain your work.
How would your answer change if the interest rate was 10%? Show and explain your work.
In class we developed a “marginal benefit of harvesting” and “marginal cost of harvesting” equation and diagram to establish a principle for optimal harvest rotation. Use this diagram to explain what is happening to the optimal harvest rotation in this scenario when the interest rate increases from 8% to 10%. (You do not need to use actual numbers—just reflect the change in the diagram and provide an explanation.)
Consider the optimal harvest rotation model. Use the model to show what would happen to the optimal harvest rotation if the stand of timber was found to be habitat for an endangered and protected species. Thoroughly explain, with examples, the effects of social cost considerations on the optimal timing of harvest.
Research, describe, and comment on some policy options available to help address the social cost of deforestation.

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