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Unformatted text preview: EEP 101/ECON 125 Prof. Zilberman GSIs: Brian Gross, Jenny I t Problem Set 2 Solutions 1. ( Public Goods-40 points - you will lose 1 / 2 point for not showing your work and 1 / 2 point for setting up the problem correctly and showing work but making an error) You have just received an important assignment as a consultant to the Prime Minister of a small country called Zilberopia. The Prime Minister is seeking advice on how to best manage a long-neglected wildlife reserve called Giannini Park. Giannini Park has a total area of 100 acres, and the annual marginal maintenance cost (MC) is: MC = $0 . 5 A where A is the number of acres maintained. Using the valuation tools acquired in EEP101/ECON125, you have estimated the willingness to pay for acres of maintained park by each of the country's 5 citizens to be: MB 1 = 20- . 3 A . Assume that MB 1 ≥ (i.e. citizens never dislike additional park acres being maintained). (a) 22 points The Prime Minister would like to see a report of the following (including your calcu- lations): i. What is the aggregate demand for acreage (1 point) in Giannini Park and the socially op- timal amount of maintained acres (1 point) ? Graph the aggregate demand (1 point) and marginal cost curves (1 point) as well as the optimal level of acreage (1 point) . Aggregate demand (or aggregate marginal bene t) is the sum of the individual demands, which can be calculated as 5 · (20- . 3 A ) = 100- 1 . 5 A. We calculate the socially optimal amount of acres by setting aggregate demand = marginal cost: 100- 1 . 5 A = 0 . 5-→ A * = 50 = socially optimal amt. of maintained acres. ii. How much would the annual budget expenditure be if the optimal level of acreage in Giannini Park were maintained through the use of the central government's tax revenues instead of entry fees (1 point) ? How much would each citizen pay in taxes for the park (1 point) ? (assume each citizen is charged the same amount of taxes to fund the park) Please label the area corresponding to budget expenditures (1 point) and total consumer surplus (1 point) (total consumer surplus for all citizens) on a graph. The government provides the socially optimal amount of acres, at a marginal cost of 0.5A. Hence the total cost of maintaining 50 acres would be the annual budget expenditure. This can be calculated as: ´ 50 . 5 AdA = 0 . 25 A 2 | 50 = 0 . 25 · 50 2- 0 = 625 . This is the area under- neath marginal cost curve up to A = 50 . If the government taxes each citizen equally to fund the park, the tax per citizen would be the budget expenditure divided by number of citizens = 625 / 5 = 125 . Total consumer surplus is the area below the aggregate demand curve and above the marginal cost curve, up to A = 50 ....
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This note was uploaded on 04/04/2010 for the course C 125 taught by Professor Zilberman during the Spring '09 term at Berkeley.
- Spring '09