(a) What would be the economically efficient number of wells? Explain why social benefits (profits) are maximized at this level of output.

[Hint: Calculate the total revenue and marginal revenue for each number of wells.]

(b) If each well is privately owned by a different farmer without any regulations, how many wells will operate? Is this number of wells economically efficient? Also, is this number of wells ecologically sustainable in the long-term?

[Hint: Calculate the average revenue for each number of wells.]

(c) Suppose a new technology is adopted that reduces the cost of operating a well from 600 to 400 pesos. Now, what is a socially efficient (i.e. profit-maximizing) number of wells with the new technology? How has the introduction of this new technology affected environmental sustainability?

Transcribed Image Text:

Farmers in an arid region of Mexico draw their irrigation water from an underground aquifer. The aquifer has a natural maximum recharge rate of 340,000 gallons per day (i.e., 340,000 gallons per day filter into the underground reservoir from natural resources.) The total product schedule for well operations looks like this: Number of Wells Operating 10 20 30 40 50 60 70 80 90 Total Water Output (Thousand Gal./Day) 100 200 280 340 380 400 400 380 340 The cost of operating a well is 600 pesos per day. The value of water to the farmer is 0.1 pesos per gallon. Farmers in an arid region of Mexico draw their irrigation water from an underground aquifer. The aquifer has a natural maximum recharge rate of 340,000 gallons per day (i.e., 340,000 gallons per day filter into the underground reservoir from natural resources.) The total product schedule for well operations looks like this: Number of Wells Operating 10 20 30 40 50 60 70 80 90 Total Water Output (Thousand Gal./Day) 100 200 280 340 380 400 400 380 340 The cost of operating a well is 600 pesos per day. The value of water to the farmer is 0.1 pesos per gallon.

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a The 40 wells would be an economically efficient number of cells as this level of output maximizes ... View the full answer