1. The current fee for renting a picnic shelter at a county park by the river is $25. With this
fee, 50 people use the shelter each weekend. Suppose the marginal cost of maintaining and
cleaning the shelter is constant (the supply curve is horizontal) and equal to $25 per user.
The county is considering raising the fee to $30, and estimates that this would decrease the
number of users to 35 per week.
a. Draw the supply and demand curves for the shelter at the original fee. Label the market
b. Draw the change that results from the higher fee. Label the new market equilibrium.
c. Label all relevant areas with a separate letter (A, B, C, etc.) and use these letters to
calculate the Social Surplus before the fee increase. Make sure to identify all relevant
components of SS in your calculation.
d. Use the letters from the previous question to identify the change in social surplus
attributable to the increase in the fee.
e. Because of the reduced use of the shelter, demand in the secondary market for rental space
at the community center increases. Assuming that the price of community center use is set
equal to the marginal cost of operating the center and marginal costs are constant (i.e., the
supply schedule is horizontal), and no externalities result from the reduced use of the
shelter and the increased use of community center space, are there additional costs or
benefits due to the increased demand for community center space? Why or why not?
f. Because of the reduced use of the park shelter, demand in the secondary market for plastic
tablecloths falls by 2,000 units per year. Assume there is a tariff on tablecloths (which are
mostly imported) that existed prior to the new fee. Assuming that the marginal cost of
producing a tablecloth is $1.0 per unit, that these marginal costs are constant (i.e., the
supply function is horizontal), that no externalities result from the use of tablecloths, and
that the tariff adds 5 percent to the supply price, are there any additional costs or benefits
due to this shift? If so, how large are they?
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