90.2K

Verified Solution

Link Copied!

Q1 (18 points) Public Goods/CBA: Suppose a firm is considering provision of a public good to three consumers with the following demand functions: Q1 = 50-0.5P1; Q = 70- Pz; and Q = 100-P3; where Q = quantity of public good and P = $/unit price (or mWTP) for the good. The firm's marginal cost (or supply) function is MC = 20 a) Plot all functions including the aggregate demand on one diagram and calculate the socially efficient quantity (Q*) of the public good. Calculate the price each consumer would be willing to pay for this Q* amount? (4 + 2 + 2 points) b) Since it is impossible to charge different price to different consumer for the same amount of public good, one approach is to charge a 'fair' or 'average price' to each. Determine which consumer(s) would or wouldn't be willing to pay such fair price. Would the firm be able to provide the public good? Justify your answer. (3 points) c) Calculate the total benefits (TB) and total costs (TC) of this public good. (2 points) d) Suppose now the government steps in to provide the public good but requires a cost-benefit analysis (CBA) for a time horizon of 100 years with r = 10%. To provide the good, the initial cost would be $30,000 in the current year (t = 0), annual O&M costs would be equal to the TC you found in (c), and annual benefit would be equal to the TB you found in (c) starting from year t = 1. Calculate the NPV of this project. (3 points) e) As with many projects, suppose there is a possibility of overshooting costs. Assume that there is 80% chance that the PV(costs) would be what you have found in (d) but 20% chance that it would be 25% higher. Recalculate the NPV considering this uncertainty into account. (2 points) Q1 (18 points) Public Goods/CBA: Suppose a firm is considering provision of a public good to three consumers with the following demand functions: Q1 = 50-0.5P1; Q = 70- Pz; and Q = 100-P3; where Q = quantity of public good and P = $/unit price (or mWTP) for the good. The firm's marginal cost (or supply) function is MC = 20 a) Plot all functions including the aggregate demand on one diagram and calculate the socially efficient quantity (Q*) of the public good. Calculate the price each consumer would be willing to pay for this Q* amount? (4 + 2 + 2 points) b) Since it is impossible to charge different price to different consumer for the same amount of public good, one approach is to charge a 'fair' or 'average price' to each. Determine which consumer(s) would or wouldn't be willing to pay such fair price. Would the firm be able to provide the public good? Justify your answer. (3 points) c) Calculate the total benefits (TB) and total costs (TC) of this public good. (2 points) d) Suppose now the government steps in to provide the public good but requires a cost-benefit analysis (CBA) for a time horizon of 100 years with r = 10%. To provide the good, the initial cost would be $30,000 in the current year (t = 0), annual O&M costs would be equal to the TC you found in (c), and annual benefit would be equal to the TB you found in (c) starting from year t = 1. Calculate the NPV of this project. (3 points) e) As with many projects, suppose there is a possibility of overshooting costs. Assume that there is 80% chance that the PV(costs) would be what you have found in (d) but 20% chance that it would be 25% higher. Recalculate the NPV considering this uncertainty into account. (2 points)

Answer & Explanation Solved by verified expert

See Answer