1. Consider a community of five households. Fire services (F) will be supplied to the community at a price of $200/unit. Fire services are a pure public good for this community. In the private non-cooperative Nash equilibrium, the community buys 25 units of F, with all 25 units purchased by household one, and 0 units purchased by the other four households. Household one has an income of $100,000 to spend on Fire Services and All Other Goods (A). The price of A is $1/unit. a. Draw the budget constraint for houschold one on a diagram with F on the x-axis and A on the y-axis. Add an indifference curve consistent with the household choosing to buy 25 units of F. b. Suppose the community government decides to tax each of the households $1,000 and use the $5,000 in taxes collected to buy 25 units of F to be supplied to the community as a public good. Show the new budget constraint for household one. Add an indifference curve consistent with household one's new optimal level of F to be 35 units. To achieve this optimal consumption bundle, household one will buy 10 units ofF out of the household after-tax income of $99,000. c. Based on your analysis in part b, what is the extent of the crowd out of uornment nublic provision intervention?
1. Consider a community of five households. Fire services (F) will be supplied to the community at a price of $200/unit. Fire services are a pure public good for this community. In the private non-cooperative Nash equilibrium, the community buys 25 units of F, with all 25 units purchased by household one, and 0 units purchased by the other four households. Household one has an income of $100,000 to spend on Fire Services and All Other Goods (A). The price of A is $1/unit. a. Draw the budget constraint for houschold one on a diagram with F on the x-axis and A on the y-axis. Add an indifference curve consistent with the household choosing to buy 25 units of F. b. Suppose the community government decides to tax each of the households $1,000 and use the $5,000 in taxes collected to buy 25 units of F to be supplied to the community as a public good. Show the new budget constraint for household one. Add an indifference curve consistent with household one's new optimal level of F to be 35 units. To achieve this optimal consumption bundle, household one will buy 10 units ofF out of the household after-tax income of $99,000. c. Based on your analysis in part b, what is the extent of the crowd out of uornment nublic provision intervention?
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
Related questions
Question
Transcribed Image Text:1. Consider a community of five households. Fire services (F) will be supplied
to the community at a price of $200/unit. Fire services are a pure public
good for this community. In the private non-cooperative Nash equilibrium,
the community buys 25 units of F, with all 25 units purchased by household
one, and 0 units purchased by the other four households.
Household one has an income of $100,000 to spend on Fire Services and All
Other Goods (A). The price of A is $1/unit.
a. Draw the budget constraint for household one on a diagram with F on the
x-axis and A on the y-axis. Add an indifference curve consistent with the
household choosing to buy 25 units of F.
b. Suppose the community government decides to tax each of the
households $1,000 and use the $5,000 in taxes collected to buy 25 units
of F to be supplied to the community as a public good.
Show the new budget constraint for household one. Add an indifference
curve consistent with household one's new optimal level of F to be 35
units. To achieve this optimal consumption bundle, household one will
buy 10 units of F out of the household after-tax income of $99,000.
c. Based on your analysis in part b, what is the extent of the crowd out of
private provision by the government public provision intervention?
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
This is a popular solution!
Trending now
This is a popular solution!
Step by step
Solved in 2 steps with 2 images
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, economics and related others by exploring similar questions and additional content below.Recommended textbooks for you
Principles of Economics (12th Edition)
Economics
ISBN:
9780134078779
Author:
Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher:
PEARSON
Engineering Economy (17th Edition)
Economics
ISBN:
9780134870069
Author:
William G. Sullivan, Elin M. Wicks, C. Patrick Koelling
Publisher:
PEARSON
Principles of Economics (12th Edition)
Economics
ISBN:
9780134078779
Author:
Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher:
PEARSON
Engineering Economy (17th Edition)
Economics
ISBN:
9780134870069
Author:
William G. Sullivan, Elin M. Wicks, C. Patrick Koelling
Publisher:
PEARSON
Principles of Economics (MindTap Course List)
Economics
ISBN:
9781305585126
Author:
N. Gregory Mankiw
Publisher:
Cengage Learning
Managerial Economics: A Problem Solving Approach
Economics
ISBN:
9781337106665
Author:
Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Publisher:
Cengage Learning
Managerial Economics & Business Strategy (Mcgraw-…
Economics
ISBN:
9781259290619
Author:
Michael Baye, Jeff Prince
Publisher:
McGraw-Hill Education