Suppose that the cost of capturing a cockatoo and transporting him to the United

Question

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 $700, then the equilibrium price of cockatoos in the United States will be what?

a. $61. b. $244.44. c. $75. d. $110. e. $155.56

Explanation / Answer

Note - I am going on the assumption that if discovered, the smuggler will be fined AND the birds will be confiscated.

Probability that a bird will reach the US alive and not confiscated if discovered = 100% x (1 - 50% death rate) x (1 - 10% discovery/confiscation rate) = .45p

Expected cost per bird = $40 per bird costs + $70 expected fine costs ($700 fine x 10% discovery rate) = $110

.45p = $110 -> p = $110 / .45 = $244.44

Answer is b. $244.44

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