Q:

I don't understand Fall 2006 Final Exam - Part 3. 2. Valley of the Locusts (e) because $25 and $75 payments don't look rational.

A:

Ok, so the quantity is 50 because that is the socially optimal quantity, and the price is still at $100. I disagree with the answer in the solutions(!). For a quantity of 50, M would be willing to pay 120-50=$70. Similarly, L would be willing to pay 80-50=$30. This $70+$30 covers the cost of the bugs and is what I would suggest. I am not sure where the $75 and $25 comes from.

## Thursday, December 13, 2007

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