Tut7 - (c) Continue from part (b). Now assume these...

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Economics 290: Canadian Microeconomic Policy Tutorial #7 (Week of June 25) 1. In the Lindahl equilibrium, each consumer of a pure public good pays a price (or tax share) per unit of the good equals the marginal social cost of the good. True/False. Explain. 2. Security guards patrolling a small community protect 5 residents living there. Security services are pure public goods, and the cost of providing one security guard is $60 per day. The marginal benefits for these residents are as follows (G is the number of guards): 20 2 i G MB = - , for i = 1, 2 (residents 1 and 2) 22 i MB G = - , for i = 3 (resident 3) 5 2 i G MB = - , for i = 4, 5 (residents 4 and 5) (a) What is market equilibrium number of security guards? Is the market outcome efficient? Why or why not? (b) Now assume these residents decide to vote on how many guards to hire. Each resident pays 1/5 of the costs. What is the voting equilibrium under majority rule? Explain why the voting equilibrium in this question is inefficient.
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Unformatted text preview: (c) Continue from part (b). Now assume these residents can engage in costless bargaining. Show how the efficient outcome can be achieved through bargaining. 3. A family consisting of a mother and two children has a weekly income of $500. The family spends all income on food and housing. The prices of food and housing are normalized to 1. The government is planning to use one of the following three programs to help this poor family: (1) Give this family a cash transfer of $300 per week. (2) Subsidize the rent: For each dollar spent on housing, government pays 50 cents. (3) Give the family housing vouchers worth $300 per week. (a) Draw the initial budget line and budget lines under three income assistance programs. (b) Under what circumstance program (2) is preferred to the other two programs? (c) Program (3) is never preferred to program (1). True/False. Explain....
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