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Graded Assignment

To be handed out before 02 May (11:59 am)

(Send hard copy to Khun Tuk )
mcm stands for million cubic meter
$ is the currency used
P refers to price or value per unit used
MB is the marginal economic benefit
MC is marginal cost of water

Q refers to the quantity of water used, supplied or demanded (1,000 m is the base volumetric unit)
WTP refers to willingness-to-pay
- Drawing graphics help analyze the problems and show results
- Please do indicate units whatever result is shown
- Please make calculations explicit and explain how you get to a result
- Refrain from copying-pasting from other groups; just do the job and avoid trouble: any suspiscion of
copy-pasting will result in a F grade for this assignment

The SmallTown water pricing dilemma

A small town (called SmallTown) has a water supply network serving households. It is assumed that all
connected households behave according to one same demand function. It is also assumed that all fully
pay their water bills.

Water is currently supplied at Pc=8$ per 1000m (current price). Overall current supply of domestic water
is 1,000,000 m per year (assumed to be the demand Qd).
Q #1: What is the annual total revenue of the water utility (service provider) (excluding costs)?

A survey reveals that households would be willing to pay up to 200$ per 1,000m in order to satisfy their
basic needs in domestic water (such is the price of 20-liter, large bottles of drinking water supplied by
vendors). Assuming that 200$ per 1,000m is the maximum WTP:
Q #2: Establish the demand function and the marginal benefit function for all households as one
sector in SmallTown) (develop equations under the hypothesis of a exponential demand function)
Q #3: Establish the total benefit of that sector, also called consumer surplus CS

The utility agency (water supplier for SmallTown) bears total costs while supplying water, following a
supply equation as follows:

TC(Q) = 3. 10 Q + 6 Q
(note that same units and calculations bases still apply as in previous questions)
Q #4: Establish the marginal cost function. Establish the net revenue of the water utility under Pc
and current demand. Calculate the market-clearing price of water (also called equilibrium price
Pe). Compare Pe and Pc. Comment.
Under financial difficulties, the utility decides to change the price from Pc to Pe.
Q #5. How would a change from Pc to Pe alter demand Qd, CS?
Q#6: Calculate the net benefit of supplier (or producer surplus PS) and CS under the two prices
scenarios (draw some graph to illustrate).
Q#7: What is the total economic value (CS + PS) of domestic water as supplied and used in
SmallTown, under the two scenarios? Discuss.