A collaborative federal and state program has been proposed in response to acid rain damage in Newport Bay, Maryland. To estimate the incremental benefits of the program, you use the travel cost method based upon the following pre- and post-policy recreational demand functions:
Pre-policy: P = 62 - 0.02V 1 Post-policy: P = 80 - 0.02V 2 ,
where V is the number of visitors (in thousands) and P is the admission fee. Assume the admission fee is set at $20 per visitor. Use this information for any or all of Questions.
-Before the policy was put into effect, estimated consumer surplus (in thousands of dollars) was valued at
A) 2,100
B) 44,100
C) 90,000
D) 45,900

Question

Quizplus · Accepted Answer

To calculate the consumer surplus before the policy, we need to use the pre-policy demand function: P = 62 - 0.02V₁. Setting the admission fee at $20 (P=20), we can solve for V: 20 = 62 - 0.02V*1*1*1*1, V = 2100. Consumer surplus is calculated as the area between the demand curve and the admission fee line, which is a trapezoid in this case. Using the formula for the area of a trapezoid (1/2)(base 1 + base 2)(height), we get: (1/2)(62+20)*(2100/0.02) = $44,100, which is the value of consumer surplus before the policy.

A Collaborative Federal and State Program Has Been Proposed in Response