Answered: Suppose that the fish processor could…

Managerial Economics: A Problem Solving Approach

5th Edition

ISBN:9781337106665

Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Publisher:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Chapter5: Investment Decisions: Look Ahead And Reason Back

Section: Chapter Questions

Problem 5.6IP

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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 boat tour would no longer be affected. If the fish processor uses the recycling method, then the fish processor's economic profit is $1,300 per week, and the boat tour's economic profit is $1,900 per week. If the fish processor does not use the recycling method, then the fish processor's economic profit is $1,600 per week, and the boat tour's economic profit is $1,100 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 boat tour's economic profit combined) with and without recycling.

Action	Profit
Fish Processor	Boat Tour	Total
(Dollars)	(Dollars)	(Dollars)
No Recycling	1,600	1,100
Recycling	1,300	1,900

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

When the fish processor uses the recycling method, the boat tour earns $1,900−$1,100=$800$1,900−$1,100=$800 more per week than it does with no recycling. Therefore, the boat tour should be willing to pay up to $800 per week for the fish processor to recycle water. However, the recycling method decreases the fish processor's economic profit by $1,600−$1,300=$300$1,600−$1,300=$300 per week. Therefore, the fish processor should be willing to use the recycling method if it is compensated with at least $300 per week.

Suppose the boat tour has the property rights to the lake. That is, the boat tour has the right to a clean (unpolluted) lake. In this case, assuming the two firms can bargain at no cost, the fish processor willuse the recycling method and will pay the boat tourbetween $300 and $800 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 willnot use the recycling method, and the boat tour will pay the fish processorbetween $0 and $500 per week.

The boat tour will make the most economic profit whenthe fish processor has property rights to pollute the lake .

True or False: The lake will remain polluted, regardless of who has the property rights.

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