Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Question
Consider a population of consumers. When a consumer is a member of a club providing a level of provision G and having n members, they obtain utility
Where k is a positive constant and G n is the charge for club membership.
a. Derive the optimal membership for the club if it maximizes the utility of each member.
b. Assuming the club chooses G optimally given its member ship; calculate the loss due to membership of a club with suboptimal size.
c. Assume that the total population is of size m, with k
d. What club size maximizes total utility produced by the club? Contrast to the answer for part a.
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Step 1: Define how utility functions are important
VIEWStep 2: Derive the optimal membership for the club if it maximizes the utility of each member
VIEWStep 3: Calculate the loss due to membership of a club with suboptimal size.
VIEWStep 4: Figure out the club size that maximizes the total utility produced by the club
VIEWStep 5: Analyze the difference between part (c) and part (a)
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