You have been asked to provide advice to the Secretary of the Interior on a new wildlife
Question:
You have been asked to provide advice to the Secretary of the Interior on a new wildlife reserve, called Foggy Bottom Park. The park has a total area of 100 acres and the annual maintenance cost (i.e., marginal cost) is: MC = $2A, where A = the number of acres maintained. The willingness to pay for acres of maintained park by each of the country’s five citizens to be: MBi = 20 - 0.4A, where the index i represents the five citizens and thus i = 1, 2, 3, 4, 5.
i) What is the aggregate demand for acreage in Foggy Bottom Park and the optimal amount of maintained acres? Graph the aggregate demand and marginal cost curves and identify the optimal level of acreage.
ii) How much would the annual budget expenditure be if the optimal level of acreage in Foggy Bottom Park were maintained through the use of the Federal government’s tax revenues? How much would each citizen pay in taxes for the park? Label the area corresponding to budget expenditures and total consumer surplus on your graph.
iii) The Secretary has decided to contract out the operation of the park (as well as the right to charge admission equal to the shadow value of the park acres to society). Assume that the private contractor can operate the park more efficiently than the government and that MCcontractor = $1.8A. How many acres would the contractor desire to maintain? What would the per person entry fee be? What is the firm’s profit and society’s consumer surplus? Draw a graph to illustrate your answers. Remember: profits = total revenues - total costs.
Financial and Managerial Accounting
ISBN: 978-1285078571
12th edition
Authors: Carl S. Warren, James M. Reeve, Jonathan Duchac