Robert owns a cattle ranch next to a flower farm owned by Felicia. Robert's cattle tend to roam and sometimes they stray onto Felicia's land and damage her crops. Robert can choose the size of his herd and his revenues are $6 for each cow he raises. The table below shows his private marginal cost of production (MCP) and the damage each additional cow creates (marginal cow damage or MCD) are given below. # of Cattle MCP MCD 123456 334567 $3 $1 2 3 4 5 6 6 Farmer Felicia can choose either to farm or not to farm. Her cost of production is $10, and her revenue is $12 when there are no cattle roaming loose. For each additional cow her revenue is reduced by the amount in the MCD column above. To answer the following questions, you need to figure out four things: the profit maximizing number of cows for Robert to own, his profits, whether or not Felicia will farm and what her profits will be. Remember that efficient outcomes maximize the net monetary benefits to both parties; in other words, total ranching plus farming profits. a) How many cows will Robert choose if he does not pay for any damages caused to Felicia? b) Will Felicia farm? c) What will be the outcome if Robert is liable for damages? d) What is the efficient outcome (the outcome that maximizes total profits)? e) Suppose that it is possible to build a fence to enclose the ranch for a cost of $9. Is building the fence efficient? Explain. f) Suppose the farmer can build a fence around her crops for a cost of $1. Is building this fence efficient? Explain.
Robert owns a cattle ranch next to a flower farm owned by Felicia. Robert's cattle tend to roam and sometimes they stray onto Felicia's land and damage her crops. Robert can choose the size of his herd and his revenues are $6 for each cow he raises. The table below shows his private marginal cost of production (MCP) and the damage each additional cow creates (marginal cow damage or MCD) are given below. # of Cattle MCP MCD 123456 334567 $3 $1 2 3 4 5 6 6 Farmer Felicia can choose either to farm or not to farm. Her cost of production is $10, and her revenue is $12 when there are no cattle roaming loose. For each additional cow her revenue is reduced by the amount in the MCD column above. To answer the following questions, you need to figure out four things: the profit maximizing number of cows for Robert to own, his profits, whether or not Felicia will farm and what her profits will be. Remember that efficient outcomes maximize the net monetary benefits to both parties; in other words, total ranching plus farming profits. a) How many cows will Robert choose if he does not pay for any damages caused to Felicia? b) Will Felicia farm? c) What will be the outcome if Robert is liable for damages? d) What is the efficient outcome (the outcome that maximizes total profits)? e) Suppose that it is possible to build a fence to enclose the ranch for a cost of $9. Is building the fence efficient? Explain. f) Suppose the farmer can build a fence around her crops for a cost of $1. Is building this fence efficient? Explain.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:Robert owns a cattle ranch next to a flower farm owned by Felicia. Robert's cattle tend to roam
and sometimes they stray onto Felicia's land and damage her crops. Robert can choose the size
of his herd and his revenues are $6 for each cow he raises. The table below shows his private
marginal cost of production (MCP) and the damage each additional cow creates (marginal cow
damage or MCD) are given below.
# of Cattle
MCP
MCD
123456
334567
$3
$1
2
3
4
5
6
6
Farmer Felicia can choose either to farm or not to farm. Her cost of production is $10, and her
revenue is $12 when there are no cattle roaming loose. For each additional cow her revenue is
reduced by the amount in the MCD column above.
To answer the following questions, you need to figure out four things: the profit maximizing
number of cows for Robert to own, his profits, whether or not Felicia will farm and what her
profits will be. Remember that efficient outcomes maximize the net monetary benefits to both
parties; in other words, total ranching plus farming profits.
a) How many cows will Robert choose if he does not pay for any damages caused to Felicia?
b) Will Felicia farm?
c) What will be the outcome if Robert is liable for damages?
d) What is the efficient outcome (the outcome that maximizes total profits)?
e) Suppose that it is possible to build a fence to enclose the ranch for a cost of $9. Is building
the fence efficient? Explain.
f) Suppose the farmer can build a fence around her crops for a cost of $1. Is building this fence
efficient? Explain.
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