Question

Suppose the government is considering increased spending on maintaining a national park. You have been hired to evaluate the benefits of this proposal as part of a benefit-cost analysis. Use the travel cost approach to accomplish this goal, based on a $20 admission fee to the park and the following before and after recreational demand functions where Q is the number of visitors in thousands and P is the admission fee: Before new-spending policy: P=72-0.04Qd After new-spending policy: P=90-0.04Qd The benefit of this increased spending is estimated to be $_______

Answer 1

Here P = admission fee to the park = $20

Qd = number of visitors ( in 1000)

Also demand function before new spending policy,

P = 72-0.04Qd or, 20 = 72-0.04Qd or Qd= 52/0.04=1300

Total cost benefits of the government before new spending policy = P*Qd = 20*1300= $26,000(In 1000)

Also demand function after new spending policy is

P = 90-0.04Qd or 20=90-0.04Qd or Qd= 70/0.04= 1750

therefore total cost benefit of the government after new spending policy = P*Qd = 20*1750= $35000 ( In 1000)

therefore benefit of increased spending = $35000-$26000= $9000 (in 1000) = $90,00,000