Review Sheet Quiz II '11

Deriving Cost Curves from Isoquants

• isoquant
• isocost means equal expenditure
• tangency gives chosen inputs
• derive cost curve
• derive (conditional) factor demand  (show what happens when input price increases)
• show effluent tax on a diagram (using clean air services and stuff)
• show TBES on a diagram
• regulation increases cost (why)

The Firm

• proft = PQ - C(Q)
• opportunity cost
• cost function, C(Q)  also AC, AVC, AFC, VC
• marginal cost
• fixed vs. variable costs
  • c = vc + fc
  • ac = avc +afc
• producer's supply curve
  • mc above avc
  • why does p = mc?
  • price taker:  firms take p as given and choose q.
• u-shaped costs diagram
• effect of higher mc on output
• effect of higher AC on profits

Stated Preference

• We ask about WTP
• existence value
• arm chair environmentalist
• non-use value can be found only from stated preference
• option  (right not obligation to do something)
•      advantage-can wait until one knows what the thing is worth
•      irreversible
• contingent valuation
•     Steps in a CV survey.
  • 1.  discussion of other uses of public money (like foreign aid) and attitudes to policy goals (like drug treatment).  2. the problem itself (e.g. oil spills and the oil business).
  • 3.  The proposal that we want to evaluate (e.g. escort ships), 4. payment method (tax on corps and people) 5.  Reminder that there are good reasons for and against
  • 6.  The WTP question.  (e.g. would you be willing to pay $60...).  7.  Debriefing.  did the respondent undertand the questions?  8.  Other questions such as involvement with nature generally to see
  • if the responses are different for those who like/don't like nature, male/female, rich/poor, old/young etc.
•     Because different people are asked the same questions with different amount of $$$, we get a demand curve.
• conjoint
•       ask to choose among alternatives.  different amounts of native plants in garden.
•       can value the attributes of the alternatives.  (e.g. color vs. water efficiency vs cost)
• Appraisal
•       Hypothetical bias---  could say yes but do NO.
•       Scope--  sometimes people say WTP same for big and small project.

Assume price of OS is 2.  What are the costs of Q1, Q2, and Q3?

TBES.  Star is an inefficient technology that limits air to 20 units.  Emit standard is 20.  Best response is 20,50.

Cost is higher than least cost but usually lower than the technology used as the base.

Now draw one more line that shows how to get the (20,50) technique by raising the cost of air.

Readings

So far we read Krutilla (in section), Barcott (assigned for home reading), and Farrell et al. (showed figure and mentioned by-products in class