NOTE: YOU SHOULD THINK FURTHER ABOUT VARIANTS TO THIS QUESTION AS
THE SOLUTION OCCURS EXACTLY AT THE KINK IN THE CURVE WHEREIN YOU
COULD USE THE TOTAL WTP FUNCTION FOR THE [0,10] RANGE OR THE TOTAL
WTP FOR THE T>
RANGE.
What would happen if MC=1/2 T
(Hint: the intersection of MC and Total WTP curve
would occur at a point less than T=10.
Thus the appropriate Total WTP function would
be Total WTP =10-3/4 T.)
What would happen if MC=1/8 T
(Hint: the intersection of MC and Total WTP curve
would occur at a point greater than T=10.
Thus the appropriate Total WTP function
would be Total WTP =5-1/4 T.)
2.
(Answers adapted from Harris, 2006)
a.
The output, total revenue, average revenue, and marginal revenue (in pesos) for each
number of wells is expressed in the table below.
Note that the marginal revenue is the
value between two values.
For example, the marginal revenue of 600 pesos for 40 wells
is actually the marginal revenue per well between 30 and 40 wells.
The value of 600 is
obtained by taking the difference between the total revenue at 30 wells and the total
revenue at 40 wells, and dividing by 10.
Number of
Wells
Daily Output
(gallons)
Total Revenue
Average
Revenue
per Well
Marginal
Revenue per
Well
10
100,000
10,000
1,000
1,000
20
200,000
20,000
1,000
1,000
30
280,000
28,000
933
800
40
340,000
34,000
850
600
50
380,000
38,000
760
400
60
400,000
40,000
667
200
70
400,000
40,000
571
0
80
380,000
38,000
475
-200
90
340,000
34,000
378
-400
b.
If each well is independently operated, farmers will operate their well as long as their
revenue exceeds their costs, which are given as 600 pesos per well.
So, if revenue per