Suppose Milwaukee has total urban demand for water from Lake Michigan such that the marginal net benefits are P = 1 - 0.04Q each year; P is in dollars and Q is in billions of gallons. If the Great Lakes Compact limits Milwaukee to 40 billion gallons of consumption over two years, answer the following questions. Let the discount rate be 5%.
A) How much would the city consume in each year if water were not limited?
Now _____________, Next Year _____________
How much do they consume in each period under the agreement?
Now _____________, Next Year _____________
B) If population is growing by 5% per year and was not taken into account in the marginal net benefit, how should we alter the solution and allocation? You do not need to calculate the exact change, just describe in a sentence or two how and why it changes and what you would need to do to calculate the new amounts.
C) Return to the original assumptions above. What happens to the allocation in each period if the discount rate is 10% rather than 5%? You do not need to calculate the exact change, just describe in a sentence or two how and why it changes.