Chapter 2

Answers to Problems for Review

1. The following graph represents a rational model for deciding how much time you should spend studying environmental economics.

  1. Hugo's marginal utility is maximized at point A below. However, every flower that he plants between QA and QB costs less than the value of its contribution to total utility. Thus, his consumer surplus is maximized by planting QB flowers.

3. Megan can maximize her utility by consuming a combination of tea and sandals that equates her marginal utility per dollar from the two goods and exhausts her budget for spending on the two goods. This is synonymous with being on the tangency between her indifference curve and her budget constraint. Since she is currently receiving 15 utils per dollar spent on tea and 300/30 = 10 utils per dollar spent on sandals, she should allocate more money to tea and less money to sandals. As this occurs, the marginal utility from tea will decrease and the marginal utility from sandals will increase. She should stop devoting more funds to tea when the marginal utility per dollar spent on the two goods is equivalent.

4.

Note: For (d), the indifference curve consists of two points, one on each axis. Points in between represent combinations of drinking and driving that are deadly and therefore do not provide a positive utility level.

5. The following graphs illustrate the markets for (a) solar energy, (b) solar panels, (c) eco tourism, and (d) old growth forests:

6. The following graphs illustrate the market for hybrid cars as affected by (a) an increase in oil prices, (b) cheaper batteries, (c) cheaper all-electric cars, and (d) a higher minimum wage for automakers.

7. Answers might include decisions about purchases, time use, conservation efforts, food consumption, and exercise.

8. The expected value of damages is (.05)(1,000,000) + (.01)(2,000,000) + (.94)(0) = $70,000.

9.

Many people enjoy a few potted plants and trees, but in a limited area like a dorm room or a yard, overcrowding would eventually make additional plants a burden. In the graph, an additional plant becomes a nuisance at quantity Q* at which marginal utility falls below the horizontal axis and becomes negative. Beyond that point there are too many plants and total utility will increase if some plants are removed.

10. One possible answer: The most active smokestack in town is in a poor part of town. It might be economically efficient to locate that pollution near cheap homes where it lowers property values the least. However, social welfare would be higher if the poor people were compensated for bearing this burden by people in other parts of town who are richer and are likely to have a lower marginal utility of wealth.