The following information is required for Questions 1-8: The Big Choo Choo Company (BCCC) owns a rail line from the town of "Isolated" to the coastal port of "Notso." It cost BCCC $20 million to build the rail line in 2007. It is now 2014. The Small Gold Company (SGC) has discovered gold deposits near Isolated that they want to export overseas. There are almost 20,000 ounces of gold in the mine. The current price of gold is $400 per ounce and it is expected to remain at that level over the life of the mine. (Ignore discounting, in this question.) SGC want to transport the gold to the port using the Notso-Isolated rail line. They have no alternative transportation substitutes available. Suppose that it costs BCCC $5 per ounce to transport the gold from Isolated to Notso. They have free capacity on the line. It costs SGC $10 per ounce in shipping from Notso to their overseas buyers. It will cost SGC $1 million to make the mine operational and $100 to extract each ounce of gold. BCCC and SGC negotiate over the rail freight charge per ounce for SGC's gold. SGC is negotiating a long-term contract for rail transport of the gold, before it has made the mine operational. 1. What is SGC's Willingness-to-Pay for transport of gold (as a per-ounce price)?

2. What is BCCC's Willingness-to-Sell (as a per-ounce price)? 3. What will the negotiated price be (as aper-ounceprice)?

4. Now suppose that SGC has the option of building an airport close to Isolated for $2 million and purchasing a cargo plane for $500,000 that could ship the gold straight to its overseas buyers for $25 per ounce.

BCCC and SGC sit down to negotiate over BCCC possibly supplying rail services to SGC. As a first step, they work out which option creates the highest payoff for the group: transport by rail, or building an airport to transport by air.

Group of answer choices

- They agree that the gold will be transported by rail.

- They agree that the gold will be transported by air, that is, no rail services will be supplied (so BCCC and SGC will not have a contract).

5. SGC and BCCC are negotiating a long-term price contract for rail services. What is SCG's WTP (as a per-ounce price), if the mine has not yet been developed? SGC has not yet built an airport, but has the option of building an airport.

6. Does SGC's option of building an airport and purchasing an airplane affect BCCC's WTS?

Group of answer choices

- Yes; it increases BCCC's WTS

- Yes; it decreases BCCC's WTS

- No; it does not affect BCCC's WTS

7. What will the negotiated price be (as a per-ounce price), if SGC has the option of building an airport?

8. Will SGC ever build the airport?

Group of answer choices

- Yes, they need to build the airport in order to prove to BCCC that they have the option of air transport.

- No, this is complete information bargaining, so they don't need to build the airport; BCCC is aware that this option exists. Transport by rail still create the highest total payoff, so there is no point in building an airport. But having the option of building an airport means that SGC pays a less extortionary price for rail.

- No, this is complete information bargaining, so they don't need to build the airport; BCCC is aware that this option exists. But since they don't build the airport, it has no effect on the negotiations. The negotiated price is the same as before.