Smith and Wesson are the only two residents in a small neighbourhood. They are considering hiring a security guard. The monthly value of the security guard is $300 to Smith, and $100 to Wesson. Regardless of how the guard is paid, they will protect the entire neighbourhood. a) Explain what is the maximum price the guard could charge per month and still be hired by one of the neighbours. b) Suppose the competitive market wage for a security guard is $320 per month. The local government proposes a plan where Smith and Wesson each pay half the monthly fee. Would this plan be voted in? Would the economic surplus be higher if the neighbourhood had a security guard?

Smith and Wesson are the only two residents in a small neighbourhood. They are considering hiring a security guard. The monthly value of the security guard is $300 to Smith, and $100 to Wesson. Regardless of how the guard is paid, they will protect the entire neighbourhood. a) Explain what is the maximum price the guard could charge per month and still be hired by one of the neighbours. b) Suppose the competitive market wage for a security guard is $320 per month. The local government proposes a plan where Smith and Wesson each pay half the monthly fee. Would this plan be voted in? Would the economic surplus be higher if the neighbourhood had a security guard?

Exploring Economics

8th Edition

ISBN:9781544336329

Author:Robert L. Sexton

Publisher:Robert L. Sexton

Chapter16: The Markets For Labor, Capital, And Land

Section: Chapter Questions

Problem 5P

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