1. What do CV and EV look like for a publicly provided good if a consumer does

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1 EEP1Fall2011 ProblemSet3 Do the following problems from Berck and Helfand: (From Chapter 5, exercise #4) 1. What do CV and EV look like for a publicly provided good if a consumer does not view them as perfect complements? To examine this case, draw a curved indifference curve, with Wolves on the horizontal axis and Stuff on the vertical axis. If the quantity of wolves is 5, the consumer s utility is the point on that indifference curve associated with Wolves = 5. The consumer s income is the vertical coordinate for that point, since Stuff costs $1 per unit. Suppose that Defenders of Wildlife now provides 5 more wolves. The consumer s income has not changed, but the number of wolves has. Identify this new point, and draw the indifference curve that goes through it. Is the consumer better off or worse off? How can you tell? Now, let s figure out EV and CV. For EV, the consumer is entitled to be on the new indifference curve. Adding 5 wolves to get to the new point is one way to get to this indifference curve; another way is to stay at 5 wolves and add more income. Identify EV on your diagram. For CV, the consumer must stay on the original indifference curve. How much money would have to be taken away if there are 10 wolves to get back to the original indifference curve? Identify CV on your diagram.

2 3 (From Chapter 6, #2) 2. The following table gives information on visitors to Jellybear Park: City of Origin Population Distance Alabaster Beautiful Cornucopia Delight A researcher keeps careful track of visitors to Jellybear and learns that there is a total of 3,750 visits to the park in one year. The only cost of traveling to the park is mileage, at $1/mile. The researcher estimates the relationship between costs and number of visits per capita (per person) to be Visits/Capita= *One-Way Cost. (a) Add columns to this table identifying total costs of a visit from each place, visits per capita from each town, and the total number of visits from each town (the visits/capita multiplied by the population). Jellybear? (b) Why doesn t the researcher observe anyone coming from Delight to (c) If getting to the park is the only cost associated with a visit (there is no admission price), how many people in total visit Jellybear? Start a table with one column showing admission price (in this case, $0) and another total visits.

3 EEP1Fall2010 ProblemSet3 (d) Because of management costs, park managers are considering charging for admission to Jellybear. They are considering prices ranging from $1/visit to $5/visit. For each whole dollar value between $1 and $5 per visit, figure out (i) the new cost of visiting for each town, (ii) the new number of visits/capita from each town, (iii) the new number of visits from each town, and (iv) the total visits (remember that negative visits do not exist; they count as zero). (e) Put the information on admission price and total visits in the table from (c). This table shows the relationship between admission price and total number of visits. What is it? (f) Estimate the consumer surplus associated with visiting Jellybear Park when the admission fee is $0. (It will be an approximate value, because the relationship in (e) is not a straight line.) (g) What method have you used to estimate the value of visits to Jellybear Park? Why?

4 EEP1Fall P roblemset3 (From Chapter 7, exercise #2) 3. The Forest Service is deciding how to allocate its recreational funding. It can increase fishing opportunities in an area (for instance, by stocking), or it can build more hiking trails. It presents several options in a survey: Option Fish Stocked (Hundreds of Fish) Hiking Trails (Miles) Cost A 1 8 $50 B 4 2 $100 C 4 8 $125 In the first round, the survey respondent was asked to rank each option without regard to cost; in the next round, the survey respondent was given the cost information and then asked to rank the options while considering those costs. (a) In the first round, one respondent ranked alternative C as best, and ranked A as tied with B. Plot the different combinations on a graph, with Fish Stocked on the horizontal axis and Miles of Hiking Trails on the vertical axis. Draw indifference curves that reflect this set of preferences. Do these indifference curves reflect free disposal, slope downward, and not cross, as indifference curves should? (b) Based on the comparison of alternatives A and B, how does this respondent trade off between fish stocking and hiking trails? In other words, if he were to give up one hundred fish stocked, about how many miles of hiking trails

5 EEP1Fall ProblemSet3 would he need to get in compensation? What does this comparison tell you about how this respondent values fish stocking compared to hiking trails? (c) When the respondent was presented with the cost information, he changed his ranking so that A was best, C was second-best, and B was least preferred. Does the fact that A and B are no longer equally preferred mean that the respondent is inconsistent in his preferences? Why or why not?