economics due in 18 hours

Answer 4 questions using economics knowledge

E251-29732, Graded Application Problem Set One

Due no later than 10:00 p.m. Wednesday, March 24.

(Submit by uploading your work in the Canvas Quizzes, quiz: Graded Application Problem Set-1)

Page 1 of 2
Additional questions on next page.

Coordinating instructions: This is 1 of 2 graded application problem sets. It is worth up to 6
course percentage points. Both graded application problems sets will be worth up to 6 course
percentage points. If you earn greater than 9 course percentage points on the combined graded
application problem sets, then any course percentage points earned above 9 will count in your
course grade as extra credit.

Once you complete your work, create a “ ” file and upload to the canvas quiz called Graded
Application Problem Set One. There will be one question in the quiz for your complete
assignment to be uploaded.

The submission quiz will open on Wednesday, March 3 and will remain open until 10:00 p.m.,
Wednesday, March 24. What you submit last is the one that is graded.

Read the article: Shell to Wind Down Fossil-Fuel Output in Strategic Shift, By Sarah
McFarlan, appeared in the Wall Street Journal, February 12, 2021, print edition.

• The article is available on the Canvas class site on the page “Graded Application Problem

Sets”

After you read the article answer the below questions and create a “ ” file to submit
your answers in Canvas quizzes.

Question 1. What is the law of diminishing marginal returns? Does this law refer to a firm’s

production in the short run or the long run?

Question 2. From the article: “[Royal Dutch Shell] plans to cut its production of traditional
fuels such as diesel and gasoline by 55% in the next decade… the company said it
would double the amount of electricity it sells and roll out thousands of new
electric-vehicle charging points.”

Would Royal Dutch Shell’s decision to decrease production of fuels and
increases its production of electricity be a long-run production decision
because it will have occurred over “the next decade”? Briefly explain your
answer.

Question 3. From the article: “Renewables projects typically generate returns of around 10%,
compared with the traditional 15% targeted on oil-and-gas projects.” Assume that a
firm chooses to invest in a renewable project that earns a 10 percent rate of return
rather than an oil-and-gas project that would have earned a 15 percent rate of
return.

E251-29732, Graded Application Problem Set One

Page 2 of 2

Would the firm earn an economic profit on the renewable project? Define
economic profit and describe the difference between that and accounting
profits as discussed in class. Briefly explain your answer.

Question 4. From the article: Royal Dutch Shell “… plans to cut its production of traditional
fuels such as diesel and gasoline by 55% in the next decade. At the same time, the
company said it would double the amount of electricity it sells…”

(a) Draw and label a graph that depicts a demand and supply curve in the market
for diesel fuel.

(b) Draw another graph that depicts a demand curve and supply curve in the
market for electricity.

(c) If other things remain equal, show the impact of Shell’s decision to change its

production of diesel fuel and electricity.

(d) Summarize the impact of these changes on the equilibrium price and quantity
of diesel fuel and electricity.

Shell to Wind Down Fossil-Fuel Output in Strategic Shift

By Sarah McFarlan, appeared in the Wall Street Journal, February 12, 2021, print edition.

LONDON— Royal Dutch Shell PLC said it would start reducing oil production, calling an end
to a decades-old strategy centered on pumping more hydrocarbons as it and other energy giants
seek to capitalize on a shift to low-carbon power.

The move marks a historic shift for the company, which after starting out importing seashells
began selling kerosene in the 19th century and had sought to grow its oil business ever since.
Until recent years, it pursued expensive, environmentally challenging projects in Canadian oil
sands and Alaska, driven by fears the world could run out of oil. Now, it sees demand faltering
long before oil runs out.

Shell said Thursday its oil production had already peaked and it expects output to decline 1-2% a
year, including from asset sales, reducing its exposure to commodity prices over the longer term.
The company plans to cut its production of traditional fuels such as diesel and gasoline by 55%
in the next decade. At the same time, the company said it would double the amount of electricity
it sells and roll out thousands of new electric-vehicle charging points.

The strategy follows similar plans from rivals BP PLC and Total SE to reduce their dependence
on fossil fuels while expanding in renewable power such as wind and solar, partly in response to
growth in regulatory and investor pressure. By contrast, U.S. companies Exxon Mobil Corp. and
Chevron Corp. don’t plan to invest substantially in electricity and both say the world will need
vast amounts of fossil fuels for decades to come. Exxon does, though, plan to invest in
technology to reduce carbon emissions.

However, the pivot to low-carbon energy is seen by analysts as challenging because it requires
investments in areas where major oil companies don’t necessarily have a competitive advantage
and that have lower returns. Renewables projects typically generate returns of around 10%,
compared with the traditional 15% targeted on oil-and-gas projects.

As such, major oil companies’ green ambitions have so far failed to ignite enthusiasm among
investors, at a time when the energy industry is grappling with the fallout from the pandemic,
which prompted BP and Shell to cut their dividends.

The share prices of Europe’s three largest oil companies have fallen dramatically since Covid-19
sapped demand and sent oil prices lower, with Shell down 35% over the past year, BP 45%
lower and Total down 24%. Shell shares traded 2% lower Thursday.

Shell sought to allay any concerns about its new strategy Thursday, saying fossil-fuel production
would remain a material source of revenue into the 2030s, while reiterating its policy to increase
its dividend by 4% each year.

“By accessing the enormous opportunities that the future of energy holds we will create the
conditions for future share price appreciation,” said Chief Executive Ben van Beurden. “We
expect to radically transform Shell over the next 30 years.”

Unlike BP and Total, Shell didn’t give targets for adding renewable energy production capacity.
The company said it didn’t necessarily need to own generation capacity to sell more power, and
that it thought it could make more money focusing on areas like trading and selling the
electricity.

Shell confirmed that from now it would allocate around 25% of its spending, or $5 billion to $6
billion, to renewable energy and marketing—which includes its gas stations and lubricants
business—up from 11% previously.

The company aims to sell 560 terawatt hours of electricity a year by 2030, double its current
sales, but stopped short of setting targets for power generation. Shell sells much more power than
it produces. This is similar to its oil-and-gas business, where Shell sells around three times as
much of the fuels as it produces.

In recent years, Shell has expanded outside of oil and gas with acquisitions of businesses
including U.K. power supplier First Utility, electric-vehicle charging company Ubitricity and
battery firm Sonnen.

At the same time, it plans to invest $8 billion a year on oil-and-gas production, seeking
particularly high-value projects, and an additional $4 billion a year on its so called integrated-gas
business, which includes liquefied-natural gas. The company will add seven million metric tons
of LNG production capacity by the mid-2020s, including from projects already sanctioned in
Canada and Nigeria.

European energy companies’ plans to invest more in low-carbon power come at a time when
they are still trying to reduce debt. Shell wants to cut its debt to $65 billion from $75.4 billion at
the end of last year and targets annual asset sales of $4 billion to help meet its goal.

Copyright ©2020 Dow Jones & Company, Inc. All Rights Reserved.