Midterm 1 solutions

Specifically new ps will be higher under regulation

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: y, new PS will be higher under regulation if (B+C)>K. 2. (6 points) Consider a public good (measured in quantity Q), that is enjoyed by persons A, B, and C with marginal benefits: MB A = 6 MB B = 1 MBC = 1 The good can be produced with marginal cost MC = 2Q. a. (3 points) What is the optimal amount of the public good that should be produced, Q*? Q* is determined by the intersection of the SMB and SMC curves. SMB can be obtained by adding up the individual MB curves: SMB = MBA + MBB + MBC = 6 + 1 + 1 = 8 To find Q*, set marginal costs and benefits equal: SMB=SMC 8=2Q Q*=4 b. (3 points) Suppose that instead of this, government decides to provide 5 units of Q. What is the total cost of providing the 5 units of Q (you may assume the government has the same marginal cost function as above)? What is the t...
View Full Document

Ask a homework question - tutors are online