Answered: Suppose that the fish processor could…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Suppose that the fish processor could use a different production method that involves recycling water. This would reduce the pollution in the lake to levels safe for recreation, and the water park would no longer be affected. If the fish processor uses the recycling method, then the fish processor's economic profit is $1,000 per week, and the water park's economic profit is $2,600 per week. If the fish processor does not use the recycling method, then the fish processor's economic profit is $1,700 per week, and the water park's economic profit is $1,500 per week. These figures are summarized in the following table.

Complete the following table by computing the total profit (the fish processor's economic profit and the water park's economic profit combined) with and without recycling.

Action	Profit
Fish Processor	Water Park	Total
(Dollars)	(Dollars)	(Dollars)
No Recycling	1,700	1,500
Recycling	1,000	2,600

Total economic profit is highest when the recycling production method is .

When the fish processor uses the recycling method, the water park earns $2,600−$1,500=$1,100$2,600−$1,500=$1,100 more per week than it does with no recycling. Therefore, the water park should be willing to pay up to $1,100 per week for the fish processor to recycle water. However, the recycling method decreases the fish processor's economic profit by $1,700−$1,000=$700$1,700−$1,000=$700 per week. Therefore, the fish processor should be willing to use the recycling method if it is compensated with at least $700 per week.

Suppose the water park has the property rights to the lake. That is, the water park has the right to a clean (unpolluted) lake. In this case, assuming the two firms can bargain at no cost, the fish processor will _______ the recycling method and will pay the water park _________ per week.

Now, suppose the fish processor has the property rights to the lake, including the right to pollute it. In this case, assuming the two firms can bargain at no cost, the fish processor will______ the recycling method, and the water park will pay the fish processor ______ per week.

The water park will make the most economic profit when ________ .

True or False: The fish processor will use the recycling method only if the water park has the property rights.

True

False

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