Econ 337 TA #2 - Econ 337 TA Session 2 Jorge Catepillan...

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Econ 337 TA Session 2 Jorge Catepillan January 19, 2012 Problem 1 Young and old residents tend to have different preferences for local public services. Suppose that each old person has the utility function Uo = 2 G +2 x O , where G is consumption of a local public good and xo is an old person’s consumption of a private good. Similarly, the utility function for a young person is U y = 6 G + 2 x y . Each old person has an initial endowment of 10 dollars and each young person has an endowment of 5 dollars. The marginal cost of producing the private good is assumed to be one. Any local government can produce G units of the local public good at a total cost of NG 2 + N (4 - N ) 2 G , where N denotes the number of residents in its jurisdiction. Suppose that local governments set taxes by dividing the total cost of public goods equally among residents. a. Use Samuelson’s condition to determine the Pareto effcient level of G in acommunity with two old persons and two young persons.
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