Question

Create a graph describing a hypothetical relationship between Timber values (H) and Biodiversity values (E) in order to establish the optimal number of clear cut timber plots (n) within a forest when the objective is to maximize the economic returns to both timber and biodiversity. (10 points)

b. Please tell the story of this graph. Identify and provide the economic intuition for the optimal number plots when managing for 1) wood, 2) biodiversity and 3) both. (10 points)

Answer 1

Lets analyze this question where you face trade offs between timber & biodiversity. Thus, if you have more timbers, biodiversity will be hurt and vice versa

So let the graph be be an indifference curve with Biodiversity on Y axis and Timber values on X axis as shown below:

b) Not lets analyze this graph. This graph would be downward sloping because lets say that the forest is fully bio diverse. Cutting of trees is prohibited. Hence, If law is passed that allows deforestation, you would give up higher biodiversity to gain timber values.

This means that the MRS of biodiversity for timber is highest at point A. However, this point is not economically optimal because you are not getting enough economic values from timber.

Lets move to point C. This point represents that the deforestation has happened sufficient times such that you have less biodiversity. This means that now you will be willing to substitute less biodiversity for timber. Hence, MRS is low at point C.

Thus, we can say that the optimal point is e where you can have enough of both of timber values and biodiversity compared to points A & C. When managing for wood(1), you would like to be at point C where you have enough wood. When managing for biodiversity you would like to be at point A. In case of both, you would be at point E where you have enough of both