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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
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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.
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Water is currently supplied at Pc=8$ per 1000m (current price). Overall current supply of domestic water
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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)?
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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
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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:
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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.