Suppose that the cost of capturing a cockatoo and transporting him to the United States is about $40 per bird.Cockatoos are drugged and smuggled in suitcases to the United States.Half of the smuggled cockatoos die in transit.Each smuggled cockatoo has a 10% probability of being discovered, in which case the smuggler is fined.If the fine imposed for each smuggled cockatoo is increased to $1,000, then the equilibrium price of cockatoos in the United States will be

Question

Quizplus · Accepted Answer

Given the cost of $40 per bird and a 50% mortality rate, the cost for each surviving bird doubles to $80. With a 10% chance of a $1,000 fine, the expected fine cost per bird is $100. Adding these costs gives $180 per surviving bird. Since half the birds die, to break even, the price must cover the cost of two birds, leading to a price of $360 for two or $180 each. However, the correct calculation for the equilibrium price includes considering the fine correctly, leading to a different result than the provided options, suggesting a misunderstanding in the explanation process. The correct approach involves calculating the expected cost including the smuggling success rate and fine risk, which would adjust the equilibrium price accordingly.

Suppose That the Cost of Capturing a Cockatoo and Transporting