Question 1:
Californian almond orchands are using approximately one million bee hives each spring to pollinate the almond trees. The U.S. demand for Californian almonds is described by p = 100 - 2q and the entire production is consumed domestically. The supply function of Californian almonds is characterized by p = 10 + q. However, in the recent years the problem of colony collapse disorder (CCD) has significantly increase the pollination cost. As a result the supply function of Californian almonds is now described by p = 20 + 3q.
(a) Find what is the total willingness to pay in order to cure CCD.
(b) A pharmaceutical company has developed a drug that, when sprayed over the bee hives,guarantees 100% that CCD will not appear. The cost of spraying one million bee hives is $600. Assuming the cost is to be paid now, while the benefits in the Californian almondsmarket from curing CCD will accrue after two years, should the U.S. government by thisdrug? Assume that r = 8%.
Question 2:
Assume that the society is trying to allocate 300 units of a depletable resource across twotime periods. The inverse demands for this resource over the two periods are given byP0= 160 - 0.5q0and P1= 170 -0.5q1. The marginal extraction cost for the resource isconstant over an entire period but it decreases between periods. More specifically, MC0= 20and MC1= 10. The discount rate is r = 0.5 (i.e., 50%).
(a) What are the efficient quantities for each of the two periods? What are the correspondingprices and MUCs?
(b) How will your answers in part (a) change if the available stock of this resource increasesto 800 units?