Suppose there is a society with two people who have the following valuations of level y of a public good: v1(y) = 1210√y and v2(y) = 410√y so their marginal benefits are given by 605/√y and 205/√y, respectively. The cost of providing the public good is given by c(y) = 10y. So we have MC(y) = 10. Suppose that their utility is given by u1 = x1 + v1(y) and u2 = x2 + v2(y) , where xi denotes person i’s money (that is not spent on the public good). Further, suppose their wealth/income levels are given by w1 = 500 and w2 = 800. (a) What is the socially optimal level of the public good?
Suppose there is a society with two people who have the following valuations of level y of a public good: v1(y) = 1210√y and v2(y) = 410√y so their marginal benefits are given by 605/√y and 205/√y, respectively. The cost of providing the public good is given by c(y) = 10y. So we have MC(y) = 10. Suppose that their utility is given by u1 = x1 + v1(y) and u2 = x2 + v2(y) , where xi denotes person i’s money (that is not spent on the public good). Further, suppose their wealth/income levels are given by w1 = 500 and w2 = 800. (a) What is the socially optimal level of the public good?
Chapter1: Making Economics Decisions
Section: Chapter Questions
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1. Suppose there is a society with two people who have the following valuations of level y of a public good: v1(y) = 1210√y and v2(y) = 410√y so their marginal benefits are given by 605/√y and 205/√y, respectively. The cost of providing the public good is given by c(y) = 10y. So we have MC(y) = 10.
Suppose that their utility is given by u1 = x1 + v1(y) and u2 = x2 + v2(y) , where xi denotes person i’s money (that is not spent on the public good). Further, suppose their wealth/income levels are given by w1 = 500 and w2 = 800.
(a) What is the socially optimal level of the public good?
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