Midterm 1 solutions

Specifically new ps will be higher under regulation

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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...
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