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2350pqset0006an - above that MSB A is equal to the sum of...

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ECON2350 - V. Bardis Answers to Practice Set 6 1. See notes. 2. See notes. 3. a. Each person will plant the amount such that his MWTP or Marginal Benefit (MB) is equal to the price. Therefore, the ‘market outcome’ is 11 - q a = 1 q am = 10 6 - q b = 1 q bm = 5 b. In the market outcome, each person disregards the benefit his plants have on the other. Therefore we expect that each buys less that the ‘socially optimal’ amount and so the total number of plants will be less than the efficient one. Note that the plants in A’s garden are ‘consumed’ by both A and B so they are a ‘public good’. The same is true for the plants in B’s garden. c. Let MSB A be society’s marginal benefit (or MTWP) for plants in A’s garden. It follows from the
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Unformatted text preview: above that MSB A is equal to the sum of the individual MB’s. From the table: MSB A = (11-q a ) + (1) = 12-q a Likewise, letting MSB B be society’s marginal benefit (or MTWP) for plants in B’s garden, we get MSB B = (1) + (6-q b ) = 7-q b Society’s welfare is maximized when MSB A = p and MSB B = p . Therefore, we get 12-q a = 1 ⇒ q * a = 11 7-q b = 1 ⇒ q * b = 6 As expected, each person actually plants less than the efficient amount. 4. MWTP(1) = (1000) + (1300) = 2300 > 1500, MTWP(2) = (1800 - 1000) + (X-1300) = 800 -1300 + X = X-500 < 2000 therefore if X < 2500, then Q*=1, and if X > 2500, then Q*=2. 5. See notes. 1...
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