Kara and Kyle are competing sockeye salmon fishers. Both have been allocated ITQs that limit their catch to 2,000 tons of sockeye salmon each. Kara's cost per ton is $8; Kyle's cost per ton is $12. If the market price of sockeye salmon is $15 per ton, what is the minimum amount per ton that Kara would have to offer Kyle to convince him to sell Kara his ITQs?

Question

Quizplus · Accepted Answer

To determine the minimum amount per ton that Kara would have to offer Kyle, we need to consider the profit that Kyle would make if he caught and sold his 2,000-ton quota on his own versus selling his quota to Kara for a negotiated price.

If Kyle caught and sold his entire quota at $15 per ton, he would earn a profit of ($15 - $12) = $3 per ton, which would amount to a total profit of $6,000.

If Kara offered Kyle $3 (or more) per ton for his ITQs, Kyle would be indifferent between selling his quota to Kara or catching and selling the salmon on his own, since either way he would earn the same profit of $3 per ton.

Therefore, the minimum amount per ton that Kara would have to offer Kyle to convince him to sell Kara his ITQs is $3.

Kara and Kyle Are Competing Sockeye Salmon Fishers