1. A private firm owns some acres of open land surrounding a small lake. It is deliberating whether to develop it into a recreational park and charge admission. It estimates that recreational demand is well-described by the price equation: P = $10 - .05Q, where Q denotes visitors per day and P is the daily admission price per visitor. It expects to incur a daily fixed cost of $600 per day that includes maintaining the park and paying property taxes. Additional visitors cause no appreciable wear and tear and require negligible cleanup so the associated marginal cost is effectively zero.

a. What daily price would maximize the firm's daily revenue? Can the firm profitably operate the park?

b. Suppose instead that a non-profit organization owns the land and is considering creating the same park. Because it is not subject to property tax, its fixed cost is only $455 per day. Is it economically feasible for the non-profit to create the park? If so, determine its price and the resulting number of visitors.

2. In problem 1, suppose that the city owns the land in question and is considering creating the park. It will finance the park using general tax revenue and revenue from any admission price it chooses to charge.

a. To maximize the benefits generated by the park, what admission price should it charge? Explain carefully.

b. At this price, how many daily visitors will use the park? How much daily consumer surplus will be generated? Should the public park be built (does it pass the benefit-cost test)?

c. Which one (the non-profit park or the city-operated park) generates the greater net benefit? 3.