Suppose that the cost of capturing a cockatoo and transporting him to the United States is about $40 per bird.Cockatoos are drugged and smuggled in suitcases to the United States.Half of the smuggled cockatoos die in transit.Each smuggled cockatoo has a 10% probability of being discovered, in which case the smuggler is fined.If the fine imposed for each smuggled cockatoo is increased to $900, then the equilibrium price of cockatoos in the United States will be

A) $130.
B) $85.
C) $288.89.
D) $67.
E) $200.

Question

simra gilani · Accepted Answer

Final Answer : C, Explanation :  To find the equilibrium price, we need to consider the supply and demand for smuggled cockatoos in the United States.Demand:Assume that there are 100 potential buyers of smuggled cockatoos in the United States. In a competitive market, the demand curve would be at the market price, P, and would be represented by a line going horizontally at a quantity of 100.Supply:Suppose that the supply of smuggled cockatoos is given by the following equation:QS = 200 - 10PNote that for every dollar increase in the price, the quantity supplied increases by 10 birds. This is because the suppliers are willing to take more risks and transport more birds as the price increases. This supply curve intersects the demand curve (at P = $20 and Q = 100) and determines the equilibrium price and quantity of smuggled cockatoos in the United States.However, we must also factor in the cost of fines and the likelihood of detection of smuggled cockatoos.The expected cost of transporting one smuggled cockatoo is:($40 cost of transportation) + (0.5 x $0 value of dead bird) + (0.1 x $900 fine) = $130Therefore, the supply curve shifts up by $130. The new supply curve is now QS = 70 - 10P.Solving for the new equilibrium, we get:70 - 10P = 10010P = 30P = $3But this is the price before the cost of fines is factored in. To get the equilibrium price after the fine increase, we need to add the $900 fine to the expected cost of transporting one smuggled cockatoo:($40 cost of transportation) + (0.5 x $0 value of dead bird) + (0.1 x $900 fine) + ($900 fine) = $1030Therefore, the new supply curve is QS = 975 - 10P.Solving for the new equilibrium, we get:975 - 10P = 10010P = 875P = $87.50But we must also consider that the price of the smuggled cockatoos must be high enough to cover the risk of detection by law enforcement agencies. If the probability of being detected is 10%, then the price must be high enough to compensate for the additional risk.Assuming that the additional risk is compensated by a 50% markup, the equilibrium price of smuggled cockatoos in the United States would be:$87.50 x 1.5 = $131.25Rounding to the nearest dollar, we get an equilibrium price of $132 or choice C.

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