EC314-Fall 2010 Problem Set 5 Matt Turner When you write up your answers, your goal should be to (1) be correct, and (2) convince your reader that your answer is correct. Answers which do not achieve these goals will not be awarded full credit. To accomplish the second objective, it is helpful if your work is legible and if all steps are presented, possibly with a line of explanation. Please STAPLE pages together so that we do not lose them. (This problem set updated: 18 August 2010) . Problems 1. 10 units of water are to be allocated between urban and rural dwellers. Demand for the two groups is, P u ( w u ) = 10-w u P r ( w r ) = 5-w r /2. (a) Find the allocation of water that maximizes social surplus. Illustrate this on a graph. (b) Suppose that rural dwellers own water rights and sell them in a competitive market market. i. Find the equilibrium allocation and price both analytically and graphically. ii. If the discount rate is
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