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?

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Explanation / Answer

Solution is:

$40 [base price]

+ .5*(40) [because 50% chance of dieing and having to go get another one]

+ .1*(700) [because 10% chance of having to pay a fine due to smuggling]

= $130 each

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