Question

Question 3 10 pts GU te inai: you 《uan usan el her this year or mexi, and th at ou will only be able to take ten trips this year and next. Let your WTP for a day o skiing at Big White this year be $100 for the first year, $90 for the second, declining to $10 for the tenth day of skiing, and let your WTP be the same next year. If your discount rate is zero, how many trips will you take this year? Hint: You are trying to maximize the present value of the total willingness to pay.] O 10 0 9 0 8 O 6 O 5 O 4 0 3 O 2 O 1 O 0

Answer 1

The Choice of opting for the skiing this year would directly related to the availability of the number of skiing opportunities the following year. We have two economic concepts that we need to study here, one being the ‘Diminishing Marginal returns’ and the other being the ‘willingness to pay’. As per the given situation , we have a total of 10 skiing opportunities available for us in a time period of this year and the next year together, i.e. we need to choose between two years, as to how many skiing opportunities we will take up in the two years. Our aim is to decide how many skiing passes we will consume this year and how many we will leave for the next year. According to the economic concept of the willingness to pay, the diminishing marginal utility pays a major role in our choice making. Let us discus the same below :

                                      Given that our WTP for the first unit for the first year is $100, and the second unit is $90, similarly it goes down to $10 for the tenth unit ( if consumed this year). This WTP value is applicable for the years. If we examine the human behavior of choices, we would want to maximize the present value of out total willingness to pay. But we are also aware that with the increasing quantity of skiing this year, the diminishing marginal utility plays its part and our desire to have more and more skiing this year reduces, Further, we also want to enjoy equal benefit of our demand for skiing In the next year. Since we are ready to pay $100 for the first unit this year and the next year, and only $10 for the tenth unit, we would want to distribute the choice of the number of skiing opportunities in such a way that we get maximum satisfaction from both years.

First Year         WTP                                     Second Year      WTP

1^st pass             $100 1^st pass               $100

2^nd pass            $90 2^nd pass               $90

3^rd pass             $80 3^rd pass               $80

4^th pass             $70 4^th pass               $70

5^th pass             $60 5^th pass               $60

                                              Here, we can see that after we have enjoyed the 5^th pass in the First year, for which we are ready to pay ( our willing to pay ) is $50 , if we enjoy the next pass, then our WTP reduces to $50, however, if we keep that pass for the next year, then we can attain more satisfaction out of enjoying that pas the next year, and our WTP would also be $60 which is equal to the 5^th pass enjoyed this year. Therefore, the optimum choice for us would be that we enjoy 5 skiing passes this year and 5 skiing passes the next year.