Q5.

If you will be receiving 600 dollars in 8 years, what is this amount worth in
present value? Assume a discount rate of 5% and round your answer to the
nearest whole number
Ans. PV = 600/(1+r)^n = 600/(1 + 0.05)^8 = 406.06 = 406
(a) 406

Q26
Ans. (You have answered it correctly)
it is not possible to make the amount of pollution is zero pollution. simply, it
won't be efficient for us. the goal is to maximize total welfare for society as a
whole, both for current generation and future. that can be done by achieving the
optimum level where
1 The marginal benefits and costs of reduction are equal
2 Net monetary benefits are maximized
3 It is impossible to make one person better off without making another person
worse off
and the pollution is at efficient level.

Q28
Ans. If there is no liability for damages caused by Rays cattle, then Ray will
maximize his profits by raising the cows to a number where MR = MC for raising
cows
MR=MC=6 when number of cattle is 5
Thus, in case if there is no liability for damages caused by Rays cattle, he will have
5 cattles.
At this level, the damage to Farmer fern is 5. Since her revenue is 12 and costs are
10, her profits are $2 without damage but since there is no liability on Ray, Fern
will face a loss of $5 due to cattle.
Her net loss will be: 2-5 = $3

Q29
Ans. In case the government steps in and says Ray is liable for compensating Fern
the exact amount for negative external damages caused by his cattle, the costs of
Ray will rise by amount equal to Marginal Damage(MD)
Now the optimal point will for Ray will be where MR = MC + MD
Since at 3 cattle, MR = 6 and MC+MD = 4+3=7 i.e. costs are greater than revenue,
so he will not operate at 3 cattle.
At 2 cattle, MR=6 and MC+MD = 3+2=5
So he will raise only 2 cattle in case the government steps in and says Ray is liable
for compensating Fern the exact amount for negative external damages caused by
his cattle.
In any case, irrespective of what level of cattle Ray raises, the profits of Fern will
be TR TC = 12 10 = $2

Q30
Ans. Based on Coase theorem, Ray and Fern can achieve an optimal outcome by
bargaining. The bargaining can be done if we assign property rights of Farm to
one person and the other person can pay the Farm owner to use the resource.
However, even with Coase theorem, we wont get a better outcome than in Q29
because it is the optimal outcome.
Suppose the right to use farm is given to Ray. He is willing to accept payment for
reducing the number of cattle such that his loss from not raising additional cattle
is equal to revenue from payment received from Ray.
Fern is earning a profit of $2 if there is no cattle, so she is ready to pay upto $2 to
reduce the number of cattle. Since at cattle level 3, the MR for Ray is 4 and MC is
4, thus, a profit of $2 from this 3rd cattle. However since fern would be willing to
give upto $2, Ray would be willing to accept $2 for not raising the 3rd cattle, thus,
ray will raise only 2 cattle if he is offered $2 from Fern. This is again the outcome
which was predicted in previous question.