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PS3_spring2006_sol

# PS3_spring2006_sol - EEP101/ECON125 Spring 2006 Solution to...

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EEP101/ECON125 Spring 2006 Solution to Problem set 3 Question1 (6 pts) Explain briefly the following terms a) Option Value (2 pts) The value an individual puts on having the option to possibly use a good or service from environmental resources at some point in the future. b) Willingness to pay (WTP) (2 pts) The maximum the individual would be willing to pay to acquire the benefits associated with an environmental resource. c) Willingness to accept (WTA) (2 pts) The minimum the individual would be willing to accept as just to compensation for the forgone benefits associated with an environmental resource. Question 2 Public good (45 points). Please put a box around your answer Due to budget cuts, the East Bay Regional Park Authority is no longer able to cover the costs of maintaining Tilden Park. Officials are considering imposing a tax on Alameda County residents, and they hire you to estimate how much people are willing to pay. You estimate that each of Alameda Country’s six residents (which are all young students) has the following demand curve (each year) for Tilden Park: p 1i = 100-10A 1i , where A represents the number of open park acres. a) Calculate the aggregate demand curve for Tilden park acreage. (3 pts) Answer: Because the park is a public good, we must sum individual demands vertically to obtain the aggregate demand. 6 1 (100 10 ) 6*(100 10 ) 600 60 i p A A A = = - = - = - Note: None of the six individuals is willing to pay anything to increase the park beyond A =10 acres. b) Suppose the marginal cost of maintaining Tilden Park is \$180 per year. What is the efficient number of acres of park to supply? (3 pts) Answer: Because MC(A) =180 TC(A)=180A (ignore the fixed cost). The social

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