Consider a town with three residents. The residents' demand curves for various acres of a public park are shown below. If the park is currently 2 acres, and land costs $20 per acre, the town should:

Question

Consider a town with three residents. The residents' demand curves for various acres of a public park are shown below.    If the park is currently 2 acres, and land costs $20 per acre, the town should:

Quizplus · Accepted Answer

The town should purchase two additional acres because the sum of the residents' marginal benefits for the third acre is greater than the marginal cost of the third acre. However, the sum of the marginal benefits for the fourth acre is less than the marginal cost of the fourth acre, indicating that purchasing four additional acres would be inefficient. Therefore, option D can be eliminated. Option A (reducing the size of the park) would decrease all residents' total benefits, making it an unfavorable option. Option C (not changing the size of the park) would also result in suboptimal outcomes since the marginal benefits of the third acre are not being utilized.

Consider a Town with Three Residents