Consider a town with three residents. The residents' demand curves for various acres of a public park are shown below. Suppose the city receives a grant that pays one half of the cost of each acre the city buys. If the cost of land is $28 per acre, the optimal park size is

Question

Consider a town with three residents. The residents' demand curves for various acres of a public park are shown below.  Suppose the city receives a grant that pays one half of the cost of each acre the city buys. If the cost of land is $28 per acre, the optimal park size is

Quizplus · Accepted Answer

The optimal size occurs where the marginal cost of an additional acre equals the marginal benefit of an additional acre. With the grant, the effective cost of land would be $14 per acre, which is equal to the public's marginal benefit of the 6ᵗʰ acre.

Consider a Town with Three Residents