Question

1. Air pollution is a vital issue in China as the economy growing rapidly. In particular, Beijing and Shanghai are two large cities suffering from the high level of particulate matters (PM), which are harmful to environment and health. The level of PM10 in Beijing is 122 and in Shanghai 79. To reduce the direct exposure to PM, some people wear mask in polluted cities. Assume the demand for mask in Beijing is M= 12 – P and in Shanghai M= 8 – 1.5 P, where M is the number of masks demanded (millions per week) and P is the price of mask ($).
   1. How much is the total willingness to pay of people living in Beijing and Shanghai to remove all PMs? (Assume that masks are able to control PMs significantly).
   2. What does the difference between the two demand curves show?
   3. Suppose the average price of mask in both cities is $2. How much is the willingness to pay of people living in Beijing to have air quality improved to that of Shanghai?
   4. How much is the annual willingness to pay of people living in Beijing to have air quality improved to that of Shanghai? Assume WTP will be a lump sum payment now and the annual interest rate is 10 percent compounded at the end of each week.

Answer 1