E202Solutions8.3

# E202Solutions8.3 - a If each villager decides individually...

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a. If each villager decides individually how to invest, how many llamas will be sent onto the commons, and what will be the resulting total village income (from llamas and from bonds)? Answer : The following table shows the income per llama, the village income from grazing llamas, together with the marginal village llama income. Each villager will buy a llama as long as the marginal benefit of income per llama exceeds the marginal cost of the \$15 forgone by not investing the \$100 in bonds. Three llamas will be sent onto the commons. The resulting total village income will be \$48 from the llamas plus \$45 from government bonds, or \$93. Number of llamas on the commons Price per 2-year- old llama (\$) Income per llama (\$/yr) Village llama income (\$/yr) Marginal llama income (\$/yr) 1 122 22 22 22 2 118 18 36 14 3 116 16 48 12 4 114 14 56 8 5 112 12 60 4 6 109 9 54 -6 b. What is the socially optimal number of llamas for this village? Why is that different from the actual number? What would be total village income be if the socially optimal number of llamas
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