Economics 4440/5440

Homework #3
Economics of Natural Resources and the Environment

Dr. Michael Nieswiadomy

Due: Oct. 20, 2015, 11:59 p.m.

All answers should be typed. Assemble everything into one combined pdf or MS Word
document.
1) (20 points) Assume that Alessi Balsamic Vinegar sells for $3.50 for a 4 year old
bottle and that a 20 year old bottle sells for $10.50. Calculate the annual rate of
return that the company is expecting to earn. Show your work. Do not use a
calculator with a built-in function for calculating rate of return. You can use a
calculator for natural logarithms and Eulers constant. Hint: use natural
logarithms.

Solution:Here,
Price of 4 year old Vinegar bottle (P4)
Price of 20 year old vinegar bottle (P20)

= $3.50
=$10.50

We know,
F = P (1+r) n
Where, F = future value
P = present value
r = rate of annual return
n = number of years

So,
$3.50
$10.50

= P (1+r) 4 ...............................................eqn(1)
= P (1+r) 20. eqn(2)

Dividing eqn(2) by eqn(1) we get

10.5 P (1 r ) 20

3 .5
P (1 r ) 4

Or, 3 = (1+r) 16
Taking log on both sides

Log3 = 16 log (1+r)

Or, 0.4771 = 16 log (1+r)
0.4771
log(1 r )
16
Or, 0.02982 = log (1+r)

Or,

Now,
e 0.02982 e log(1 r )

Or, 1.0294 = 1+r

Or, r = 0.0294
Therefore, required annual return is 2.94%

2) (20 points) Calculate the levelized payment for a $1 annuity lasting 50 years
growing at 3% and discounted at 5%. Show your work, using the technique that I
showed you in class.

Solution:Here, A = $1
n = 50
Rate of Discount ( r ) = 5% =0.05
Annual growth Rate ( g) = 3% = 0.03
1 r
1
Net discounted rate (r ) = 1 g
*

1.05
1
1.03

= 0.0194
Formula to calculate present value of annuity =

A
r*

1
1

* n
1 r

We can calculate the levelized Payment for 50 years

PVannuity =

1
1
1
50
0.0194 1 0.0194

1
= 51.5461
50
1.0194
1

= 51.5461

2.6135

1.6135
= 51.546

2.6135

83.1722
2.6135

=$31.82

Therefore, Levelized payment for a $1 annuity lasting for 50 years at 3% growth rate and
5% discount rate is $31.82.

3) (20 points) Go to www.cityofdenton.com. You should find a pdf document that

has this header

Consumer Information
Denton Municipal Utilities
The effective date at the bottom of the page is Oct. 1, 2015. Find the residential
monthly water rates for the Summer (May through October) for the 4 blocks: 1st
block: up to 15,000 gallons; 2nd block: 15,001 to 30,000 gallons; 3rd block: 30,001
to 50,000 gallons; and 4th block: 50,000 + gallons.

a) Print out these results and attach them to your homework. Highlight them
with a yellow highlighter in MS Word of Adobe Acrobat.

Answer

Consumer Information
Denton Municipal Utilities
ELECTRIC RATES
Residential
Facility Charge

$8.25/bill (single phase)

$16.50/bill (three phase)

Energy Charge
Winter (November-April)

6.18/KWH first 600 KWH

4.11/KWH all additional KWH
Summer (May-October)
6.18/KWH all KWH
Energy Cost Adjustment*
Adjusted Periodically
Transmission Cost Recovery Factor** Adjusted Periodically

Residential Renewable Energy

Facility Charge

$8.25/bill (single phase)

$16.50/bill (three phase)

6.18/KWH first 600 KWH

4.11/KWH all additional KWH
Summer (May-October)
6.18/KWH all KWH
Renewable Cost Adjustment*
Adjusted Periodically
Transmission Cost Recovery Factor** Adjusted Periodically

General Service Small

$15.80/bill (single phase)
$21.10/bill (three phase)

Energy Charge
First 2,500 KWH
7.67/KWH
All additional KWH
4.02/KWH
Energy Cost Adjustment*
Adjusted Periodically
Transmission Cost Recovery Factor** Adjusted Periodically

Commercial Renewable Energy

1,000 KWH Blocks
100% of Actual Energy Consumption

RCA* Rate/KWH
RCA* Rate/KWH

*The Energy Cost Adjustment (ECA) and Renewable Cost Adjustment (RCA)
rates are adjusted periodically as the energy market fluctuates. Call for
current rates. **The Transmission Cost Recovery Factor (TCRF) rate is
adjusted periodically as ERCOT transmission tariffs fluctuate. Call for current
rates.

SOLID WASTE RATES

Residential Refuse and Recycling
Trash Cart Size
Large Trash Cart
Standard Trash Cart

One Cart
$32.00/bill
$26.75/bill

Residential

Facility Charge
3/4 Meter
$13.85/bill
1 Meter
$18.40/bill
1 1/2 Meter
$23.85/bill 2
Meter
$30.35/bill
Volume Charge
Winter (November-April) $3.80/1,000 gallons (all consumption)
Summer (May-October)
$3.80/1,000 gallons (up to 15,000 gallons/bill)
$5.50/1,000 gallons (15,001-30,000 gallons/bill)
$7.40/1,000 gallons (30,001-50,000 gallons/bill)
$9.75/1,000 gallons (50,000+ gallons/bill)
Irrigation Customers
See rate ordinance for applicable rates.

Commercial/Industrial

Energy Charge
Winter (November-April)

Facility Charge

WATER RATES

Facility Charge
3/4 Meter
1 Meter
1 1/2 Meter
2 Meter
Volume Charge
Irrigation Customers
Winter (November-April)
Summer (May-October)

$22.60/bill
$27.05/bill
$32.05/bill
$42.60/bill
$4.15/1,000 gallons
$4.15/1,000 gallons
$5.50/1,000 gallons

WASTEWATER RATES
Facility Charge
Volume Charge

Residential

$10.35/bill
$3.95/1,000 gallons effluent

(Billing based on 100 percent of average monthly water billed from December-February.) (18,000 gallon
wastewater volume cap.)

Commercial/Industrial
Facility Charge
Volume Charge

$25.70/bill
$5.00/1,000 gallons effluent

(Billing based on 90 percent of monthly water consumption.)

Equipment Services and Eating Establishments

Facility Charge
Volume Charge

$25.70/bill
$6.80/1,000 gallons effluent

(Billing based on 90 percent of monthly water consumption.)

Two Carts
$58.50/bill
N/A

DRAINAGE RATES

(Each rate includes one standard-size recycling cart. A second recycling cart is
available at no extra cost.)

Residential
Commercial Front and Side Load

Square Feet in Block

Monthly Charge per Bill

Container Size
Commercial Side Load
Front Load (<4 cubic yards)
Front Load (>4 cubic yards)

Billing per Cubic Yard

$32.50
$25.00
$22.50

(All solid waste commercial rates are based upon one collection per week.)

Commercial Open Top (Roll-Off)

Monthly Rental $160.00
$270.00

0-600
601-1,000
1,001-2,000
2,001-3,000
3,001-4,000
4,001-5,000
5,001-6,000

$.50
$1.00
$3.35
$5.45
$7.60
$9.75
$12.00

Collection Charge*

*Plus landfill fees based on weight.

b) Calculate the cost of consuming 60,000 gallons of water in a summer month.

Assume the house has a meter. You do not need to calculate the
wastewater costs. Show your work.

Solution:Bill to be paid for consumption of 60000 gallons in the summer month can be calculated
as
60000 gallons = 15000 gallons +15000 gallons +20000 gallons + 10000 gallons
= 15 3.8+15 5.5+20 7.4+10 9.75
= $382
Total cost = $382+$13.85
= $395.85

c) Draw the price schedule similar to one of those in Figure 9.4 in your text.
Make sure to show the each block point e.g., 15,000 gallons, 30,000 gallons &
50,000 gallons. You can draw this in Word using its drawing feature (Insert,
Shapes, Drawing Canvas).

Solution:Inverted block rate structure

Per
Unit
Cost
$
9.7
5
7.4
5.5
3.8
15000

30000

50000

50000+

Usage
Gallons

4) (20 points) Go to www.cityofdenton.com. Use the same information sheet

described above. Find the residential solid waste (i.e., garbage) rates in dollars.
a. (6 pts.) What is the charge for a large cart, medium cart, and a small cart
per month? Mark them with a yellow highlighter in MS Word or Adobe
Acrobat.

Solution:-

Consumer Information
Denton Municipal Utilities
WATER RATES
ELECTRIC RATES
Residential
Facility Charge

$8.25/bill (single phase)

$16.50/bill (three phase)

Energy Charge
Winter (November-April)

6.18/KWH first 600 KWH

4.11/KWH all additional KWH
Summer (May-October)
6.18/KWH all KWH
Energy Cost Adjustment*
Adjusted Periodically
Transmission Cost Recovery Factor** Adjusted Periodically

Residential Renewable Energy

Facility Charge

Facility Charge
3/4 Meter
$13.85/bill
1 Meter
$18.40/bill
1 1/2 Meter
$23.85/bill 2
Meter
$30.35/bill
Volume Charge
Winter (November-April) $3.80/1,000 gallons (all consumption)
Summer (May-October)
$3.80/1,000 gallons (up to 15,000 gallons/bill)
$5.50/1,000 gallons (15,001-30,000 gallons/bill)
$7.40/1,000 gallons (30,001-50,000 gallons/bill)
$9.75/1,000 gallons (50,000+ gallons/bill)
Irrigation Customers
See rate ordinance for applicable rates.

$8.25/bill (single phase)

$16.50/bill (three phase)

Energy Charge
Winter (November-April)

6.18/KWH first 600 KWH

4.11/KWH all additional KWH
Summer (May-October)
6.18/KWH all KWH
Renewable Cost Adjustment*
Adjusted Periodically
Transmission Cost Recovery Factor** Adjusted Periodically

General Service Small

Facility Charge

$15.80/bill (single phase)

$21.10/bill (three phase)

Energy Charge
First 2,500 KWH
7.67/KWH
All additional KWH
4.02/KWH
Energy Cost Adjustment*
Adjusted Periodically
Transmission Cost Recovery Factor** Adjusted Periodically

Commercial Renewable Energy

1,000 KWH Blocks
100% of Actual Energy Consumption

Commercial/Industrial
Facility Charge
3/4 Meter
1 Meter
1 1/2 Meter
2 Meter
Volume Charge
Irrigation Customers
Winter (November-April)
Summer (May-October)

$22.60/bill
$27.05/bill
$32.05/bill
$42.60/bill
$4.15/1,000 gallons
$4.15/1,000 gallons
$5.50/1,000 gallons

WASTEWATER RATES
Facility Charge
Volume Charge

Residential

$10.35/bill
$3.95/1,000 gallons effluent

(Billing based on 100 percent of average monthly water billed from December-February.) (18,000 gallon
wastewater volume cap.)

RCA* Rate/KWH
RCA* Rate/KWH

*The Energy Cost Adjustment (ECA) and Renewable Cost Adjustment (RCA)
rates are adjusted periodically as the energy market fluctuates. Call for
current rates. **The Transmission Cost Recovery Factor (TCRF) rate is

Residential

Commercial/Industrial
Facility Charge
Volume Charge

$25.70/bill
$5.00/1,000 gallons effluent

adjusted periodically as ERCOT transmission tariffs fluctuate. Call for current

rates.

(Billing based on 90 percent of monthly water consumption.)

Equipment Services and Eating Establishments

Facility Charge
Volume Charge

SOLID WASTE RATES

Residential Refuse and Recycling
Trash Cart Size
Large Trash Cart
Standard Trash Cart

One Cart
$32.00/bill
$26.75/bill

(Billing based on 90 percent of monthly water consumption.)

Two Carts
$58.50/bill
N/A

DRAINAGE RATES

(Each rate includes one standard-size recycling cart. A second recycling cart is
available at no extra cost.)

Commercial Front and Side Load

Container Size
Commercial Side Load
Front Load (<4 cubic yards)
Front Load (>4 cubic yards)

Billing per Cubic Yard

$32.50
$25.00
$22.50

(All solid waste commercial rates are based upon one collection per week.)

$25.70/bill
$6.80/1,000 gallons effluent

Residential
Square Feet in Block
0-600
601-1,000
1,001-2,000
2,001-3,000
3,001-4,000
4,001-5,000
5,001-6,000

Monthly Charge per Bill

$.50
$1.00
$3.35
$5.45
$7.60
$9.75
$12.00

Commercial Open Top (Roll-Off)

Monthly Rental $160.00
$270.00

Collection Charge*

*Plus landfill fees based on weight.

b. (6 pts.) What is the size of each cart? It is not on the rate page. Search on
the city of Denton website. This may take some searching. Attach the
printed web page.

Solution

:TRASH CARTS

Three sizes of green trash carts are available: small (45-gallon), medium (65-gallon), and
large (95-gallon).
Bag your trash!
Bagging trash helps to prevent litter during collection and transport,
protects your container, and reduces litter on the streets and at the ECOW.E.R.C.S. Landfill.
Examples of Trash: This is not a comprehensive list of items considered trash.

c. (6 pts.) Calculate the average cost per gallon for a medium cart. Show
your work.

Solution:Size of medium cart

= 65 -gallon

Price per medium (standard trash) cart = $26.75

Average cost per gallon

65
26.75

= $2.43
d. (6 points) Calculate the average cost per gallon for a large cart. Show your
work.

Solution:Size of large trash cart

= 95 -gallon

Price per large trash cart

Average cost per gallon

= $26.75
=

95
32

= $2.97

e. (6 points) Calculate the marginal cost per gallon when a person increases
their garbage usage from a medium cart to a large cart. Show your work.

Solution:We have,
Average cost per gallon for medium cart

=$2.43

Average cost per gallon for large cart

=$2.97

Marginal cost per gallon (from medium to large cart)

=$2.97-$2.43
= $.54
= 54 cents

5) (20 points) Use Figure 1 below to determine the profit maximizing price that will
be set by OPEC as the price leader/dominant firm. Show the output produced by
OPEC and the fringe firms. Draw your lines using MS Word Shapes, under the
Insert tab.

Answer : From the given figure after drawing the required lines, we can clearly see that

Profit maximizing price set by OPEC = $50

Output produced by OPEC
= 30
Output produced by fringe firms
= 30
Total output produced
= 60

Figure 1: OPEC Price Leadership Model

105
100

Supply of
NonOPEC/Fringe
Firms

95
90
85
80
75
70
65
60
55
50

MC OPEC

45
40
35
30
25
20
15
10

World Oil
Demand

5
0
0

10

15

20

25

30

35

40

45

50

55

60

Quantity supplied

MROPEC

65

70

75

80