Question

The Town of Pawnee recently sent a survey to each of the residents asking them how much they would be willing to pay for each acre of a proposed park. The results of the survey are shown below.

# of Acres	Ann	Leslie	Tom	Ron
100	$400	$1000	$50	$0
200	$600	$1500	$30	$0
300	$400	$2000	$20	$500
400	$200	$2500	$10	$0
500	$100	$3000	$0	$0

1. (3 points) Assuming that creating the park costs $5/acre (or $500/100 acres), at how many acres of park will overall net benefits be maximized? What are the net benefits at that point? Show all work for full credit.

2. (3 points) The mayor of Pawnee, Leslie, is not happy with the results of the survey. She decides to ignore economic rationale and create a 500 acre park. Explain, from an economic perspective, why Leslie is wrong. Use terms like “Pareto Optimality” and “efficiency” in your response. Identify any net social gains or losses from this decision.

3. (3 points) Angered by the citizen’s newfound interest in economic theory, Leslie decides to do some research herself and decides that the citizens of Pleasantville might be singing a different tune if they incorporate dynamic criteria into their decision making. She determines that for a 500 acre park, the citizens will benefit by about $3100/year starting in year 1 (as per the results of the survey) while costs will be high in year 0 at $2500 but in subsequent years will only amount to a nominal maintenance cost of $500/year. At an interest rate of 5%, how long must this park be around before the net benefits are positive? Please show all calculations for full credits.

4. (3 points) While citizens of Pleasantville are glad that Leslie is coming around, they are still not pleased because they think Leslie is ignoring opportunity cost (aside from the rate of return assumed in the discount rate). They point out that the money could easily have been used instead on a colorful mural in downtown, next to the Library. The mural could be painted in year 0 for $600, has low maintenance costs of $20/year and benefits residents $400/year after year 0. Assuming the same discount rate as before and a 3 year time frame, which project should be undertaken and why? Consider both the NPV rule and the Benefit/Cost ratio rule in your decision making.

5. (3 points) Looking again at the WTP of Pawnee residents above, do these individuals seem to have “normal” preferences? Why might their WTP be so different acre by acre? How reliable do you think this survey was in eliciting values of Pawnee residents? What attributes does the park have that would make understanding benefits challenging?

Answer 1

I hope this helps.

I have only answered the first 4 sub-parts as per the protocol

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