Exam 1

Question 1

Forests can have simultaneous outputs. What does this mean?

Answer 1

Monetary - wood products, leases, huntin/fishing/use fees, etc.

Non-monetary - scenery, water quality, flood control, non-game wildlife, carbon sequestration, etc.

Question 2

What is a simple definition of economics?

Answer 2

How to allocate scarce resources to produce maximum satisfaction

Question 3

Why is succession considered an economic process?

Answer 3

Everything on the land eventually becomes scarce over time.

Question 4

Define marginals and give an example

Answer 4

The output from the last unit of input.

Example:

Hire 1 person to plant trees, he can plant 2500/day. Hire a 2nd person to plant trees, now your total is 5000/day. The marginal output of person #2 is 2500 trees per day. Hire a 3rd person to haul trees from the truck to the planters so the planters don’t waste time re-supplying, and increase total rate to 6000 trees per day. The marginal output of person #3 is 1000 trees per day.

Question 5

Explain marginal utility and diminishing marginal utility

Answer 5

Utility is an economic term used to represent satisfaction or happiness.

The Law Of Diminishing Marginal Utility states that, all else equal, as consumption increases, the marginal utility derived from each additional unit declines. Marginal utility is derived as the change in utility as an additional unit is consumed.

Ex:

Consider the carrying capacity of the land. You can only add so many inputs to any system before outputs start to decline. Athletic training is another example - the body will eventually start to break down if you overtrain it.

Question 6

Describe the equi-marginal principle

Answer 6

In general terms – You will maximize the total benefit from using any limited input if you allocate it so that the last unit of input in each activity brings the same added benefit

Question 7

Explain these charts

Qd = quantity demand

Qs = quantity supply

P1/P2 = set price in example

Pe = market price

Answer 7

Suppliers must price their goods at market price if they wish to sell them. Price it too low, and the supply will not keep up with the demand (shortage). Price it too high, and you will end up with a surplus of goods that will remain unsold until the price is adjust to match the market. Prices will always adjust to balance the demand.

Question 8

Define stumpage

Answer 8

The price of a standing tree

Question 9

What’s the difference between and commodity and a product?

Answer 9

Commodity - indistinguishable from any other similar product on the market. Who makes it or where it comes from does not matter. Ex: No. 1 red oak lumber dried to 6% M.C.

Product - who made it and where it comes from does matter. Ex: timber frame house

Commodities get sold at market price. Products are sold using the cost-plus pricing model, there really is no market price per se.

Question 10

Define residual

Answer 10

What is left over after other things have been subtracted and allowed for

Question 11

In calculating the flow of money for forest products, who gets paid last in the calculation? Why?

Answer 11

The landowner

The value of lumber is fixed by the market. The upper limit of stumpage (what the landowner is paid for standing trees) is the upper limit of the log price (what the sawmill pays the logger) minus logging costs (what it costs to get the tree out of the woods and to the market).

Question 12

What 3 conditions create the highest stumpage values for the landowner?

Answer 12

Fully stocked stands

Well managed for high quality trees

Easier access and closer proximity to the sawmill

Question 13

What are some examples of things that can cause foreign exchange rates to change?

Answer 13

Inflation

Interest rates

Balance of trade

Political stability

Question 14

How are prices of goods affected if our currency has a high value relative to other countries?

Answer 14

Our exports are expensive, their goods (imported to us) are cheaper

Question 15

How are prices of goods affected if our currency has a low value relative to other countries?

Answer 15

Our exports are cheaper, their goods (imported to us) are more expensive

Question 16

What is inflation

Answer 16

A general increase in prices over time.

Question 17

What are the 2 major drivers/types of inflation?

Answer 17

Demand-pull inflation: too many people trying to buy too few goods; too much gov’t spending; buying frenzies; influx of money supply (low interest rates, printing more money)

Cost-push inflation: Wages are greater than productivitiy; rise in key component of production (such as oil)

Question 18

What is consumer price index?

Answer 18

An index that tracks changes in prices over time (i.e. xx in 1984 dollars would be yy in 2021 dollars)

Question 19

How do you calculate annual inflation? What about average annual inflation over a longer time period?

Answer 19

Question 20

How do you calculate the appropriate price adjustment to match inflation?

Answer 20

(Price in year X / CPI for year X) x 100

Question 21

Define the time value of money and give some examples of factors that affect time value

Answer 21

Time value is the value of not having something now (such as the money you invest in something)

factors: current needs, needs changing over time, availability of resource, risk and uncertainty about the future

Question 22

What is meant by “time preference” with regards to the time value of money? What factors might affect this?

Answer 22

How willing are you to wait for your payout?

Factors: current income, current and expected needs, education, maturity, age

Organizational factors: Depending on values/goals, corporations might take a longer view, or operate from quarter to quarter until no longer profitable. Government will almost always take a very long view on time value.

Question 23

What are some components that make up “i” value, or the costs being covered by the increased rate of return on an investment?

Answer 23

compensation for inflation, opportunity cost, and risk

Question 24

What factors might affect the overall rate of return on an investment?

Answer 24

payment period (ex: 15 vs 30yr mortgage)

assurance of repayment (ex: reliability of borrower or credit score)

the asset itself (ex: a house is more likely to recoup the value of a loan than a car is)

pure interest rate (the Fed)

Question 25

Why is it usefule to calculate the “i” value of a forestry project?

Answer 25

We have options with our money. We can put it into the project, put it into something else, spend it, or invest it in some other way. The “i” value is what we hope for our forestry project to earn. Ex: are the trees growing in value at “i” percent? This financial analysis tells us know where we stand, but doesn’t necessarily make the decsion for us, since other factors may add satisfaction other than money (beauty, biodiversity, etc.).

Question 26

How do you calculate the value of an investment at the end of the year with interest?

Answer 26

principle x (1 + i)

Question 27

How do you calculate compound interest on an investment over n years?

Answer 27

V_n = V₀(1 + i)ⁿ

V_n - value “n” years in the future

V₀ - value today

n - years compounded

i - interest rate

Question 28

What is net present value and how do you calculate it?

Answer 28

NPV - Today’s value of future payments

V₀ = Vn / (1 + i)ⁿ

Vn - value “n” years in the future

V0 - value today

n - years compounded

i - interest rate

Question 29

What is the earnings rate equation and what can we use it for?

Answer 29

Given our cash flows over time and our ultimate payoff or value, it can tell us at what percent our investment grew over time.

Also, given the CPI change over a given number of years, we can use it to calculate the annual rate of inflation over that time.

Question 30

What’s the difference between real and nominal dollars?

Answer 30

Real dollars are adjusted for inflation, nominal dollars are not.

Question 31

Explain how you’d build an “i” value, and why you would do this

Answer 31

We could use this to figure out how much we need our investment to grow in order to cover our costs, risk, and inflation.

Question 32

What is the formula to find the present value of an annual series and what is it for?

Answer 32

Used to find NPV when there is a repeated cash flow annually over the investment period.

Question 33

What does the annual series discount formula do functionally?

Answer 33

It discounts everything back to 1 payment period before the first payment