TEST # 5 - CHAPTER 6 Chapter 6: Valuing the Environment Name _________________________________________ Test Score________ Part A: Multiple-choice

TEST # 5 – CHAPTER 6

Chapter 6: Valuing the Environment

Name _________________________________________

Test Score________

Part A: Multiple-choice Questions (40 points)   

1. A local forest provides habitat for deer that are harvested by hunters. The hunters receive what type of benefit in this case?

1. Direct use value

2. Indirect use value

3. Option value

4. Bequest value

5. Existence value

2. A wildlife preserve provides what type of economic benefits?

1. Use values only

2. Non-use values only

3. Existence values only

4. Direct and indirect use values only

5. Both use and non-use values

3. A decision to postpone commercial development of an undisturbed parcel shows an example of what type of economic benefits?

1. Direct use values

2. Indirect use values

3. Existence values

4. Option values

5. Bequest values

4. Which one of the following valuation techniques is not based on the value of marketed goods or services?

1. Hedonic pricing

2. Avoided cost valuation

3. Production function valuation

4. Contingent valuation

5. Engineering cost valuation

5. An economist estimates the value of a nature preserve by calculating the price premium people pay for houses located adjacent to the preserve. This is an example of what type of economic valuation?

1. Hedonic pricing

2. Production function valuation

3. Contingent valuation

4. Travel cost method

5. Engineering cost valuation

6. Asking people to indicate their economic values in a survey is an example of what type of economic valuation?

1. Travel cost method

2. Contingent valuation

3. Hedonic pricing

4. Production function valuation

5. Avoided cost valuation

7. Valuing environmental services based on the prices of marketed goods is called ...

1. Travel cost method

2. Contingent valuation

3. Hedonic pricing

4. Production function valuation

5. Avoided cost valuation

8. Which one of the following techniques would most likely be used to estimate the value of preservation of a remote arctic wildlife preserve?

1. Hedonic pricing

2. Travel cost method

3. Production function valuation

4. Engineering cost valuation

5. Contingent valuation

9. Which one of the following techniques is an example of the replacement cost method of economic valuation?

1) Contingent valuation

2) Hedonic pricing

3) Travel cost method

4) Habitat equivalency analysis

5) Cost-effectiveness valuation

10. Which one of the following statements is false?

1. Bequest value is the value of environmental services to future generations

2. Willingness-to-pay tends to be smaller than willingness-to-accept for the same service

3. The production function approach to valuation considers the cost of constructing facilities to provide environmental services

4. Contingent valuation can be used to estimate existence values

5. The value of just knowing a wild species exists is called indirect use value

11. Which one of the following statements is true?

1. A low discount rate is always better for environmental protection

2. A high discount rate is always better for environmental protection

3. A discount rate of zero is always best for environmental protection

4. Discounting will decrease the magnitude of future costs and benefits

5. High discount rates should be used to evaluate long-term impacts

12. Suppose the pure rate of time preference is 1%, the growth rate of consumption per capita is 3%, and the elasticity of the marginal utility of consumption is 2. This suggests a value for the social rate of time preference of ...

1. 2%

2. 4%

3. 5%

4. 7%

5. 9%

13. Suppose there is a 30% chance that an oil spill will occur in an area and the economic damage of the potential spill is $1 million. What is the expected value associated with the spill?

1. $3,000,000

2. $1,000,000

3. $300,000

4. $30,000

5. $3,000

14. If people are risk averse regarding environmental damages...

1. Low discount rates should be used

2. High discount rates should be used

3. Expected values will understate ecological damages

4. Irreversible actions should be taken

5. Contingent valuation responses will not be valid

15. The precautionary principle is most likely to be applied when some impacts ...

1. Involve option values

2. Are irreversible

3. Are converted to present values

4. Are estimated using the avoided cost approach

5. Involve indirect use values

16. The precautionary principle is least likely to be applied to which of the following

environmental issues?

1. Building a new road

2. Global warming

3. The approval process of a new pesticide

4. Timber harvesting in a rainforest

5. Storage of nuclear waste

17. Which one of the following statements is true?

1. All projects that provide positive net benefits should be approved

2. Cost-effectiveness analysis determines the best policy to achieve a given end

3. All projects with a benefit/cost ratio of less than one should be approved

4. Positional analysis determines the single proposal that provides the greatest net benefits

5. Cost-benefit analysis always provides estimates for all costs and benefits associated with a project

18. Suppose a legislature passes a law that mandates a 50% cut in toxic emissions. What type of analysis would most likely be used to determine how to implement this policy at the lowest cost?

1. Contingent valuation

2. Cost-effectiveness analysis

3. Positional analysis

4. Precautionary principle

5. Safe minimum standard

19. An analysis approach that considers the relationship of a proposed policy to social objectives is called ...

1. Contingent valuation

2. Cost-effectiveness analysis

3. Hedonic pricing

4. Positional analysis

5. Risk aversion

20. Which one of the following statements is true?

1. Cost-benefit analysis can give an accurate measure of all costs and benefits

2. Cost-effectiveness analysis is always preferred to cost-benefit analysis

3. Some costs and benefits will not be quantifiable in many cost-benefit analyses

4. Policymakers should never use cost-benefit analysis due to its analytical weaknesses

5. Cost-effectiveness analysis relies on economic techniques to determine policy objectives

Part B: Spreadsheet Analysis “Net Present Value Criterion” (10 points)   

Complete (in Microsoft Excel document) the following problem:

Louisiana Drilling and Exploration, Inc. (LD&E) has the funds necessary to complete one

of two risky oil and gas drilling projects. The first, Permian Basin 1, involves the

recovery of a well that was plugged and abandoned five years ago but that may now be

profitable, given improved recovery techniques. The second, Permian Basin 2, is a new

onshore exploratory well that appears to be especially promising. Based on a detailed

analysis by its technical staff, LD&E projects a ten-year life for each well with annual net

cash flows as follows:

In the recovery-project valuation, LD&E uses 20% and 32% discount rate for Permian Basin 1 and Permian Basin 2, respectively. Both projects involve land acquisition, as well as surface preparation and subsurface drilling costs of $3 million each.

a). Calculate the expected value of annual cash flows for each project.

b). Calculate the NPV for each project.

c). Which project is preferred using the NPV criterion?

NPV = PV(CF) – PV(costs)