9. Best responses for individual contributions to a public goodDmitri and Frances each rent one unit of a two-unit apartment building. The building has two separate furnaces located between the two apartments.The renters each control and pay for the heat their furnaces generate and would choose to increase the temperature of their apartments by 30degrees if the other never turned on their furnace, given that the marginal private benefit (MB) of the 30th degree is equal to the marginal cost (MC)of 1 degree of heat (assume that the MC of heat is constant and that the MB of heat is decreasing). However, each degree of heat paid for by one notonly raises the temperature in that apartment by a degree but also raises the temperature in the other apartment by half a degree.As a result, if Frances were to buy 40 degrees of heat, then Dmitri would need to purchase only|degrees of heat before his personalmarginal benefit of the final degree was equal to the marginal cost.Use the blue line (circle symbol) to plot Dmitri's best-response function (BRF) on the following graph, with the total amount of heat he will buy on thevertical axis as a function of the total amount Frances buys (horizontal axis). (Hint: Dmitri's response to Frances's purchase noted previouslyrepresents one point on the line, and the response when Frances purchases 0 degrees of heat will be the vertical intercept.) Then, use the orange line(square symbol) to plot Frances's best-response function, with the total amount she will buy (horizontal axis) as a function of the total amount Dmitribuys (vertical axis). Finally, place the black point (plus symbol) on the graph to indicate the Nash equilibrium amount of heat each person willpurchase, given the other's equilibrium choice.Note: Dashed drop lines will automatically extend to both axes.10090Dmitri's BRF807060Frances's BRF5040Nash Equilibrium3020101020 30 405060708090100HEAT BOUGHT BY FRANCESSuppose the government is worried about the low temperatures and wants to increase heat consumption.True or False: The current Nash equilibrium is inefficiently high; therefore, the government should implement a tax on heat to reach its goal.O TrueO FalseHEAT BOUGHT BY DMITRI

ace, given that the marginal private benefit (MB) of the 30th degree is equal to the margina at is constant and that the MB of heat is decreasing). However, each degree of heat paid fo by a degree but also raises the temperature in the other apartment by half a degree. of heat, then Dmitri would need to purchase only | degrees of heat before his to the marginal cost. 's best-response function (BRF) on the following graph, with the total amount of heat he wi Frances buys (horizontal axis). (Hint: Dmitri's response to Frances's purchase noted previo onse when Frances purchases 0 degrees of heat will be the vertical intercept.) Then, use the se function, with the total amount she will buy (horizontal axis) as a function of the total am int (plus symbol) on the graph to indicate the Nash equilibrium amount of heat each persor cend to both axes. (?) Dmitri's BRF Frances's BRF Nash Equilibrium

ace, given that the marginal private benefit (MB) of the 30th degree is equal to the margina at is constant and that the MB of heat is decreasing). However, each degree of heat paid fo by a degree but also raises the temperature in the other apartment by half a degree. of heat, then Dmitri would need to purchase only | degrees of heat before his to the marginal cost. 's best-response function (BRF) on the following graph, with the total amount of heat he wi Frances buys (horizontal axis). (Hint: Dmitri's response to Frances's purchase noted previo onse when Frances purchases 0 degrees of heat will be the vertical intercept.) Then, use the se function, with the total amount she will buy (horizontal axis) as a function of the total am int (plus symbol) on the graph to indicate the Nash equilibrium amount of heat each persor cend to both axes. (?) Dmitri's BRF Frances's BRF Nash Equilibrium

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question

9. Best responses for individual contributions to a public good
Dmitri and Frances each rent one unit of a two-unit apartment building. The building has two separate furnaces located between the two apartments.
The renters each control and pay for the heat their furnaces generate and would choose to increase the temperature of their apartments by 30
degrees if the other never turned on their furnace, given that the marginal private benefit (MB) of the 30th degree is equal to the marginal cost (MC)
of 1 degree of heat (assume that the MC of heat is constant and that the MB of heat is decreasing). However, each degree of heat paid for by one not
only raises the temperature in that apartment by a degree but also raises the temperature in the other apartment by half a degree.
As a result, if Frances were to buy 40 degrees of heat, then Dmitri would need to purchase only
|degrees of heat before his personal
marginal benefit of the final degree was equal to the marginal cost.
Use the blue line (circle symbol) to plot Dmitri's best-response function (BRF) on the following graph, with the total amount of heat he will buy on the
vertical axis as a function of the total amount Frances buys (horizontal axis). (Hint: Dmitri's response to Frances's purchase noted previously
represents one point on the line, and the response when Frances purchases 0 degrees of heat will be the vertical intercept.) Then, use the orange line
(square symbol) to plot Frances's best-response function, with the total amount she will buy (horizontal axis) as a function of the total amount Dmitri
buys (vertical axis). Finally, place the black point (plus symbol) on the graph to indicate the Nash equilibrium amount of heat each person will
purchase, given the other's equilibrium choice.
Note: Dashed drop lines will automatically extend to both axes.
100
90
Dmitri's BRF
80
70
60
Frances's BRF
50
40
Nash Equilibrium
30
20
10
10
20 30 40
50
60
70
80
90
100
HEAT BOUGHT BY FRANCES
Suppose the government is worried about the low temperatures and wants to increase heat consumption.
True or False: The current Nash equilibrium is inefficiently high; therefore, the government should implement a tax on heat to reach its goal.
O True
O False
HEAT BOUGHT BY DMITRI

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MB, MC 10- 8. 6 4 2. Reference: Ref 16-2 O MB, Select one: A. III B. I MC MB₁ MB3 (Figure 16.2) Lilly, who owns the Cigar Bar and Grill, is considering whether to purchase fire insurance. Without insurance, the marginal benefit of precautions to reduce the risk of fire is given by MB₁. Which of the following statements is (are) TRUE? I. With full insurance, the marginal benefit of acting to reduce the risk of fire is given by MB3. C. II D. I and III 10 II. If Lilly purchases fire insurance, whether it is full or partial coverage, the marginal benefits of acting to reduce the risk of fire will increase. Quantity of actions taken to improve fire protection III. With partial insurance, the marginal benefit of acting to reduce the risk of fire is given by MB₂.
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