On Sundays people in Los Angeles consider taking a boat toCatalina Island to spend the day on the beach there. The utilitythat a person gets from visiting Catalina is 1 ? [n/80] ? p, wheren is the number of visitors on the island and p is the price ofround-trip transportation (by boat). (Note that a visitor obtainsmore satisfaction if there are fewer other visitors on the island.)The utility of staying home is zero.
Part A: In equilibrium, how many people visit the island on a givenSunday? (Your answer should depend on p.)
Part B: Suppose that the boat companies can transport people to andfrom the island at zero cost. If the boat transportation market isperfectly competitive, what is the equilibrium price p? and what isthe number of visitors n??
Part C: Compute the total surplus in this market in the equilibriumof part (b).
Part D: How does an externality arise in this problem and is itpositive or negative?
Part E: Now suppose that the demand for boat transportation isserved by a monopoly firm. That is, a single firm sets the price p.What price will the monopolist set and how many people will visitthe island?
Part F: Compute the total surplus for the outcome of part (e). Isthe monopoly good or bad for the economy? Explain.
