Homework 2 Answer Key

Homework 2 Answer Key - Economics 1480 Answer key#2 1 Rosen...

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Economics 1480 Answer key #2 1) Rosen Chapter 4: problem 11 a. Zach’s marginal benefit schedule shows that the marginal benefit of a lighthouse starts at \$90 and declines, and Jacob’s marginal benefit starts at \$40 and declines. Neither person values the first lighthouse at its marginal cost of \$100, so neither person would be willing to pay for a lighthouse acting alone. b. Zach’s marginal benefit is MB ZACH =90-Q, and Jacob’s is MB JACOB =40-Q. The marginal benefit for society as a whole is the sum of the two marginal benefits, or MB=130-2Q (for Q 40), and is equal to Zach’s marginal benefit schedule afterwards (for Q>40). The marginal cost is constant at MC=100, so the intersection of aggregate marginal benefit and marginal cost occurs at a quantity less than 40. Setting MB=MC gives 130- 2Q=100, or Q=15. Net benefit can be measured as the area between the demand curve and the marginal benefit of the 15 th unit. The net benefit is \$112.5 for each person, for a total of \$225. 2) Rosen Chapter 4: problem 13 Britney’s marginal benefit is MB BRITNEY =12-Z, and Paris’s is MB PARIS =8-2Z. The marginal benefit for society as a whole is the sum of the two marginal benefits, or MB=20-3Z (for Z 4), and is equal to Britney’s marginal benefit schedule afterwards (for Z>4). The marginal cost is constant at MC=16. Setting MB=MC along the first segment gives 20-3Z=16, or Z=4/3, which is the efficient level of snowplowing. Note that if either Britney or Paris had to pay for the entire cost herself, no snowplowing would occur since the marginal cost of \$16 exceeds either of their individual marginal benefits from the first unit (\$12 or \$8). Thus, this is clearly a situation when the private market does not work very well. Also note, however, that if the marginal cost were somewhat lower, (e.g., MC 8), then it is possible that Paris could credibly free ride, and Britney would provide the efficient allocation. This occurs because if Britney believes that Paris will free ride, Britney provides her optimal allocation, which occurs on the second segment

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Homework 2 Answer Key - Economics 1480 Answer key#2 1 Rosen...

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