Question
Figure 2 shows a two-consumer water market. Consumer 1's marginal WTP for water is MB1=120-Q1, while Consumer 2's marginal MTP for water is: MB2=80-Q2. Because
Figure 2 shows a two-consumer water market. Consumer 1's marginal WTP for water is MB1=120-Q1, while Consumer 2's marginal MTP for water is: MB2=80-Q2. Because water is scarce, it is rationed. Each consumer receives a 60 unit allotment each week.
13. What is Consumer 1's marginal WTP for the 60th unit of water consumed?
14. What is Consumer 2's marginal WTP for the 60th unit of water consumed?
15. Suppose the water authority issues these consumers 60 coupons each which entitle the consumers to 60 units of water. However, these coupons can be traded. So one consumer can buy coupons from the other consumer, in which case, the holder of the additional permits can consume more water (for example, 2 extra units if 2 more coupons are purchased), while the coupon seller must consume less (for example, 2 units less if two coupons are sold). Based on this information, how many coupons will be traded in this market? 120Q1 = 80-.5Q2 16. Suppose the market price of coupons settles at the equilibrium WTP at which trading ceases. What will be the market price of the coupons, and the value of the consumers WTPs in equilibrium?
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