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

To find the equilibrium price, we need to compare the cost of legally importing a bird to the cost of illegally smuggling a bird (taking into account the risk of being caught and fined). Let's assume that the legal cost of importing a bird is the same as capturing and transporting a bird, which is $40.

If the price of a smuggled cockatoo is lower than $40, it would not make sense for someone to smuggle a bird because they would incur a loss. On the other hand, if the price of a smuggled cockatoo is higher than $40, it would make sense for someone to smuggle a bird because they would make a profit. Therefore, the equilibrium price of a smuggled cockatoo is $40.

Now, let's take into account the risk of being caught and fined. If the fine for smuggling a bird is $1,000, the risk of being caught needs to be less than 4% in order for it to make sense to smuggle a bird.

If the risk of being caught is higher than 4%, the expected cost of smuggling a bird would be:

Expected cost = $40 + (10% x $1,000) = $140

This means that the equilibrium price of a smuggled cockatoo would be $140 or higher.

Therefore, the correct answer is D) $311.11. This is because the cost of smuggling a bird that has a 4% chance of being caught is:

Cost = $40 + (4% x $1,000) = $80

Therefore, in order to make a profit, the price of a smuggled cockatoo needs to be at least:

Price = $80 x 2 = $160

However, since half of the smuggled cockatoos die in transit, the price needs to be even higher to account for those losses. Using the formula:

Price = ($160 + $40) / (1 - 50%) = $200

Since the equilibrium price of a smuggled cockatoo is $40, we subtract this from $200 to get the markup needed:

Markup = $200 - $40 = $160

Applying the markup, we get:

Price = $40 + $160 = $200

But since only 4% of smuggled cockatoos will be caught and fined, we need to add the expected cost of the fine:

Price = $200 + (4% x $1,000) = $240

Finally, since only 50% of smuggled cockatoos will survive, we need to account for that loss as well. Using the formula, we get:

Price = ($240 + $40) / (1 - 50%) = $311.11

Suppose That the Cost of Capturing a Cockatoo and Transporting