Tute 11answers - Introductory microeconomics ECON1001...

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Introductory microeconomics ECON1001 Semester 1 2010 Tutorial 11 Week 12 Q1 The following table shows the marginal benefit per year (in dollars) and the marginal cost per year (in dollars) to all households in a small community of the hiring of additional fire-fighters. Number of firefighters Marginal benefit Marginal cost 1 250,000 30,750 2 100,000 30,750 3 50,000 31,000 4 40,000 31,250 5 35,000 31,500 6 25,000 31,750 7 20,000 32,000 8 15,000 32,250 9 10,000 32,500 10 5,000 33,000 (a.) Is the service provided by the firefighters a public good? (b.) Plot the marginal benefit and the marginal cost in a graph with the number of firefighters on the horizontal axis. In this graph, show the optimal number of firefighters. (c.) Given the definition for the market demand curve, is the marginal benefit schedule the same as the town's demand curve for firefighters? (a.) Yes. This service is a public good because it is non-excludable and non- rivalrous. However, students may note that this is open to debate! It’s not clear how free-riding must occur. If I don’t pay my insurance fee, in theory, my house can be left to burn down. Furthermore, if firefighters are attending to one fire, they cannot attend to another. There is a degree of rivalry. There are also some interesting comparisons with national defence. (b.) The optimal number occurs where the marginal benefit schedule intercepts the marginal cost schedule. This is illustrated in the diagram below. If firefighters are “indivisible” the answer is 5.
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0 50,000 100,000 150,000 200,000 250,000 0 2 4 6 8 10 Marginal Cost Marginal benefit DOLLARS NUMBER OF FIREFIGHTERS Optimal number of firefighters (c.) This depends on contingent valuation estimates whose reliability depends on the ability of people to provide an accurate estimate of their willingness to pay. If it is accurate, it is a demand curve. Q2 The town in Q1 has three households and the marginal benefit to each household
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Tute 11answers - Introductory microeconomics ECON1001...

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