Assignment:
Farmers in an arid region of Mexico draw their irrigation water from an underground aquifer. The aquifer has a natural maximum recharge rate of 340,000 gallons per day (i.e., 340,000 gal./day filter into the underground reservoir from natural sources). The total product schedule for well operations looks like this:
|
Wells Operating
|
10
|
20
|
30
|
40
|
50
|
60
|
70
|
80
|
90
|
|
Total Water Output
|
|
|
|
|
|
|
|
|
|
|
(Thousand Gal/Day)
|
100
|
200
|
280
|
340
|
380
|
400
|
400
|
380
|
340
|
The cost of operating a well is 600 pesos per day; the value of water to the farmer is 0.1 peso per gallon. Calculate Total Revenue (TR = PQ) for each level of output.
If each well is privately owned by a different farmer, how many wells will operate? (To calculate this you will need to calculate Average Revenue, which is TR/Q. Note that the quantity of wells is given in units of 10.) Analyze this result in terms of economic efficiency and long-term sustainability.
- What would be the economically efficient number of wells? (To calculate this, you will need Marginal Revenue, which is MR = TR/Q, best shown between two levels of output). Show that net social benefit is maximized at this level of output.
- How could the socially efficient equilibrium be achieved? In this case, is the socially efficient equilibrium also ecologically sustainable?
- How would the answers change if the cost of well operation was 400 pesos per day?
Your answer must be, typed, double-spaced, Times New Roman font (size 12), one-inch margins on all sides, APA format and also include references.