Summary 747c. Suppose that government regulations dictate that twin goals—.4 ton
of CO 2 per MWh (cell I13) and an environmental/health score no
greater than 65 (cell I14)—must both be met. Determine the cost-
minimizing mix of energy sources. Proponents of nuclear power
argue that this source could provide a total capacity of 1.25 MWh of
electricity if enough new plants were built over the next 30 years. Is
such a nuclear expansion warranted?
d. An alternative to a CO 2 emission standard is a carbon tax. Policy
makers have proposed a tax of $80 per ton of CO 2 emissions to reflect
the expected cost of increased global warming. Such a tax would raise
the total cost per MWh of the first three energy sources. For instance,
an $80 tax (inserted in cell A17) would imply an added (80)(1.1)
$88 cost per MWh for coal-fired electricity (in cell B17). Under the
$80 tax, what mix of generating plants minimizes the average cost of
electricity? (Hint:In cell H17, compute the average tax per MWh;
then minimize cell H11, computed as the sum of cells H12 and H17.)
How high would the carbon tax have to be to spur expansion of
renewable energy sources?
S4. The accompanying spreadsheet is based on Chapter 6’s example of
comparative advantage in trading digital watches and pharmaceuticals
between the United States and Japan. The costs per unit for each good
(Japanese costs are expressed in yen) are listed in row 8 and are the
same as in that example. Additional information has been provided
concerning the countries’ demands for the two goods (row 7) where
demand is expressed in terms of monetary valuesper unit. (Note that for
the United States, each watch is more than four times as valuable as each
pill bottle. For Japan, the value ratio is two to one.)
a. The United States has $45 billion (cell E16) to spend between the
goods. Note that the default output levels of the goods (cells C9 and
D9) cost only $37.5 billion as computed in cell E17. In turn, cell E18
computes the total value ($54 billion) of these production levels.
Without the option to trade with Japan, what output levels generate
the maximum total value for the United States? Does the United
States specialize in a single good? Explain why or why not.
b. Given ¥ 2,500 to spend, find Japan’s value-maximizing output levels.
Does Japan specialize in a single good? Explain.
c. Now suppose that trade is possible between the countries. Cells C13
and D13 list the competitive trading prices for watches and drugs.
(For each good, the lowest cost per unit worldwide, whether in the
United States or Japan, sets the trading price.) Trade based on
comparative advantage will maximize global value (cell B18) computed
as the sum of the national values (cells E18 and J18) after converting
yen into dollars at ¥ 100 per dollar.c17LinearProgramming.qxd 9/26/11 11:05 AM Page 747