Ethiopian Civil Service University

Department of Development Economics (MA program)

Type of assignment: Individual assignment

Course Name: Natural Resource and Environmental Economics course

Submission Date: 27/05/2016

Maximum Mark: 20%

Instructions

1. Please write your name and I.D. number below and on every page of the answer sheets.
2. Be sure to explain your answers and show your work clearly and neatly.

Questions

1. Suppose that in the absence of human intervention the stock of tuna (z) would change
according to the following equation: dz/dt = 10z 0.02z2. Furthermore, suppose E units of
fishing effort will produce a harvest of tuna (x) given by x = 0.02zE. Finally, suppose the cost
of E units of effort is $4E, where $4 is the wage rate, and that the price of tuna is constant at
$1.5 dollar per unit of x.

A. Find the profit-maximizing sustainable equilibrium for this model when the tuna are
not common property (that is, when the level of effort can be controlled). Solve for
the levels of Z, E, x and profit. (8points)
2. This question explores a simple example of resources where the cost of mining increases with
the total amount of resource extracted. Suppose that the profit on a copper mine at time t is
given by t =pqt cqt2 kst , where p, c and k are exogenous constants, qt is the amount of
copper extracted in period t, and st is the total amount of silver extracted in all periods before
t. The evolution of s is given by st+1 st = qt . The value of s is initially zero. Also, the resource
is infinite supply in the sense that there is no upper limit on s. The firm will own and operate
the mine in periods 0 (now) through T1; at T the firm expects to be nationalized and to have
no subsequent revenues or costs. The firms goal is to maximize the sum of the profits it earns
in periods 0 to T1. You may assume the interest rate is zero.
A. Set up the firms optimization problem and take first order conditions. Briefly explain
what each equation shows (6points)
B. Solve for an expression giving the firms output (qt) at each point in time from 0 to T -
1. Discuss your result and give an intuitive explanation (6points)