3. Suppose that the bureaucrats who run the Defense Department are budget maximizers. Indealing with Congress, the bureaucrats announce a price p per unit of national defense and Congressgets to choose the level of defense (denoted z). Assume that the Dz curve, which representsCongress' demand for z, is given by Dz = 16 – z.Suppose the true cost per unit of national defense is 3 (i.e., c = 3). Find the socially-optimal level of defense.bureaucrats, and the resulting level of z chosen by Congress. Is national defenseunderprovided, overprovided, or optimally provided? Is part of the budget wasted bythe bureaucrats? If so, how much is wasted?a)Then, find the value of p that is announced by theb)Suppose instead that c = 12. Repeat part (a) for this case.

Congress demand for level of defense D = 16 – z P = 16 – z Cost per unit of defense = 3

Answered: 3. Suppose that the bureaucrats who run…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Suppose a new social service is introduced by a government at a fixed cost of $3,000 (note: there is no marginal cost to provide this service). This service has not been provided before and there is no available substitute for this service. Economists have estimated the marginal benefit of the new service is given by: MB = 100 – Q where Q is the quantity (in hours) of the service that is used. Please note the MB gives both the marginal private benefit (MPB) and marginal social benefit (MSB) (i.e., MB = MPB = MSB). The government imposes a price to ration use of the service to recover part of its costs. What price should be introduced to ration the use of the service to 50 hours? What is the net social benefit when the service charge is used? How does charging a price compare to providing it for free and/or rationing? Be Hint(s): similarly, think about measuring the area of consumer surplus and compare it to the governments cost. You may want to complete Q5 as you complete this…
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1. During the winter break, Sam decides to go for a skiing vacation in Aspen instead of taking piano lessons. The opportunity cost of the skiing vacation is the:cost of accommodation and food in Aspen.value of piano lessons.cost of buying a piano.amount paid to the skiing instructor. 2. Which of the following is an example of a negative externality?Smith reducing the consumption of imported wine following an increase in the price of imported winePhoebe refusing to contribute to the building of a children’s park in her neighborhoodChristina accepting a payment in cash rather than in check for her laundry servicesTom playing music loudly in his room, disturbing his roommate who has an exam the next day3. A perfectly competitive firm sells 10 units of Good X at a price of $2 per unit. It incurs a fixed cost of $5 and a variable cost of $40 to produce the good. Which of the following is true?The firm should operate in the short run but shut down in the long run.The marginal cost…
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