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
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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.
What is SGC's Willingness-to-Pay for transport of gold (as a per-ounce price)?
Please enter a whole number, with no dollar sign and no decimal point.
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Solved in 2 steps
1. What is BCCC's Willingness-to-Sell (as a per-ounce price)?
2. What will the negotiated price be (as a per-ounce price)?
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