Suppose the production possibility frontier for an economy that produces one public good (x) and one private good (y) is given by 100x² + y = 5,000. This economy is populated by 100 identical individuals, each with a utility function of the form utility = Vxy, where y, is the individual's share of private good production Yi (= y/100). Notice that the public good is nonexclusive and that everyone benefits equally from its level of production.
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- Consider an economy with a private good and public good. The economyconsists of two consumers whose utility functions are:u1(x1, y) = 1/2 ln x1 +1/2 ln y and u2(x2, y) = 1/3 ln x2 +2/3 ln y.The endowment of consumer 1 is w1 = 2, and endowment of consumer 2 is w2 = 3, both in units of private goods. The production of public good uses the linear technology y = z. 1. Find Lindahl equilibrium.Because public goods are jointly consumed, which of the following is obtained by summing the private marginal benefits across all individuals?Consider an economy with a private good and public good. The economy consists of two consumers whose utility functions are: u1(x1,y)=1/2 ln x1 + 1/2 ln y and u2(x2,y)=1/3 ln x2 + 2/3 ln y (better written equations attached) The endowment of consumer 1 is w1=2, and the endowment of consumer 2 is w2=3, both in units of private goods. The production of public good uses the linear Technology y=z. Find Lindahl equilibrium.
- Consider an economy with n consumers, one privategood and one public good. We think of the private good as “all othergoods,” and measure it in terms of money. There are n individuals inthe economy with utility functions Ui(xi, y) = αi ln y + xi, where y is thepublic good, xi is the private good consumed by individual i = 1, . . . , n,and 0 < α1 < α2 < · · · < αn are parameters. Initial endowment of privategood of each consumer is given by wi. We donote the aggregate endowment 1of the private good by w =Pi wi. The cost of producing the public good is c(y) = cy for some c > 0. Find the optimal provision of the public good as well as how much is provided under voluntary contributions.Suppose that two individuals, Jon and David, form a community and would like to construct a communal fort that would protect them from attacks. They consume both good X, a private good, and the protection from the fort, P. One unit of good X costs 1 unit while one unit of P costs 2 units, so the budget constraint for each is given by: Xi + 2Pi = 100. Both Jon and David have an income of 100 and a utility function of the form: U = log(Xi) + 2log(Pj + Pd) (a) How much protection, P, will be privately provided? What is optimal consumption of X, the private good? (b) What are the socially optimal amounts of protection, P, and consumption, X, of the private good? How do the socially optimal amounts compare to that privately provided? Explain why.Consider a two-good economy with one private and one public good. There are four consumers in this economy who contribute to public good provision. The price of the private good is $1 and the demand function of the public good for each consumer is as follows: p1 = 20 - 2G, p2 = 30-(5/10)G, p3 = 100-(G/2) and p4 = 60-G where G is the number of units of the public good and p^i is the price of each unit for consumer i in dollars. The cost of providing one extra unit of the public good is (alpha). (a) With 170 < alpha < 210, what is the optimal level of provision of the public good? Show the optimal point on a graph. (b) Is there a possibility that the public good is not supplied at all? Why? (c) If the public good is not supplied at all, what is the size of the deadweight loss due to this market failure? (d) If at least one person contributes, for what values of the public good will be supplied?
- Consider the market for flu vaccines, in which consumption causes positive externalities by creating herd immunity. Quantity supplied is given by Qs=2+2*P Marginal Private Benefit (determines individual demand of consumers of the vaccine i.e. the benefit from not getting sick) is given by Qd=60.5-2.5*MBP. Marginal Social Costs (MPC plus the benefits of externalities) is given by Qd=69.5-2.5*MSB. Plot these 3 curves on a graph with 6 points at P=11,12,13,14,15,16. What is the deadweight loss if only free-market forces are at play (i.e. externalities are not considered by the consumers)? How much should the subsidy be to bring the market to efficient equilibrium?Suppose the demand for standard sized bottled water in the US is Qd=120-30.5P where Qd is monthly quantity demanded in millions and P is the price per bottle in dollars and cents. If the marginal private cost (MPC) of producing the bottled water is one dollar, calculate the market equilibrium quantity. Explain what a constant marginal cost implies. Does that mean the total opportunity cost of producing bottled water is unrelated to how many are produced? Let’s assume that the marginal private benefit (MPB) of bottled water equals the marginal social benefit (MSB). Explain what that means. At the equilibrium calculated in part A, what do you know about buyers’ willingness to pay in each transaction?Illustrate the efficient provision of a public good regarding partial equilibrium analysis.
- Consider agent A with (inverse) demand curve for the public good PA = 60 − 2QA and agent B with inverse demand PB = 90 − 5QB, where prices are measured in £ per unit. The marginal cost of producing the public good is £10 per unit. What is the Pareto efficient level of the public good? Explain. Illustrate in a graph. [Hint: Compute the marginal social benefit of the public good by adding up the demand curves vertically, over the p’s]Using the above table, fill in the Marginal Social Benefit for a public good based on an economy of these 3 consumers. Consumer A’s price per unit Consumer B’s price per unit Consumer C’s price per unit Marginal Social Benefit QD $Blank 1 1 $11 $12 $15 $Blank 2 2 $9 $8 $12 $Blank 3 3 $6 $5 $9 $Blank 4 4 $5 $1 $5 If this public good has a constant marginal cost (MC) of $20, what is the socially optimal number of units of the public good that should be provided to the economy? Blank 5 units.Consider agent A with (inverse) demand curve for the public good and agent B with inverse demand , where prices are measured in £ per unit. The marginal cost of producing the public good is £10 per unit. What is the Pareto efficient level of the public good? Explain. Illustrate in a graph. [Hint: Compute the marginal social benefit of the public good by adding up the demand curves vertically, over the p’s - image attached that has the inverse demand function