Suppose the production possibility frontier for an economy that produces one public good (x) and one private good (y) is given by 100x² + y = 5,000. This economy is populated by 100 identical individuals, each with a utility function of the form utility = Vxy, where y, is the individual's share of private good production Yi (= y/100). Notice that the public good is nonexclusive and that everyone benefits equally from its level of production.
Suppose the production possibility frontier for an economy that produces one public good (x) and one private good (y) is given by 100x² + y = 5,000. This economy is populated by 100 identical individuals, each with a utility function of the form utility = Vxy, where y, is the individual's share of private good production Yi (= y/100). Notice that the public good is nonexclusive and that everyone benefits equally from its level of production.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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
Transcribed Image Text:a. If the market for x and y were perfectly competitive, what
levels of those goods would be produced? What would
the typical individual's utility be in this situation?
b. What are the optimal production levels for x and y?
What would the typical individuals utility level be? How
should consumption of good y be taxed to achieve this
result? Hint: The numbers in this problem do not come
out evenly, and some approximations should suffice.

Transcribed Image Text:Suppose the production possibility frontier for an economy
that produces one public good (x) and one private good (y)
is given by
100x + y = 5,000.
This economy is populated by 100 identical individuals, each
with a utility function of the form
utility = Vxy,
where y, is the individual's share of private good production
(= y/100). Notice that the public good is nonexclusive and
that everyone benefits equally from its level of production.
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