Question

Insulating 1000 square feet of a warehouse attic would save $200 a year in heating costs for each of the next 20 years.

1) According to marginal analysis, what is the maximum price the owner would be willing to pay to add this insulation? (Ignore time value of money if you know this concept as it is beyond the scope of this course.) Show your work!

2) How much would the owner be willing to pay per square foot? Show your work!

Answer 1

Total savings = 200*20 = 4000. No discounting is done for time. According to marginal analysis, the maximum price the owner would be willing to pay to add this insulation is the marginal benefit that is worth this added insulation. This implies that maximum price should be the one that is just equal to the additional cost borne. Hence the maximum price is $200 per year.

In terms of per square foot, this cost is $4000/1000 = $4 per square feet. A owner would be willing to pay a total of $4 per square foot