Van and Amy 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 45 degrees if the other never turned on their furnace, given that the marginal private benefit (MB) of the 45th 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 Amy were to buy 40 degrees of heat, then Van would need to purchase only benefit of the final degree was equal to the marginal cost. degrees of heat before his personal marginal Use the blue line (circle symbol) to plot Van'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 Amy buys (horizontal axis). (Hint: Van's response to Amy's purchase noted previously represents one point on the line, and the response when Amy purchases 0 degrees of heat will be the vertical intercept.) Then, use the orange line (square symbol) to plot Amy's best-response function, with the total amount she will buy (horizontal axis) as a function of the total amount Van 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.
Van and Amy 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 45 degrees if the other never turned on their furnace, given that the marginal private benefit (MB) of the 45th 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 Amy were to buy 40 degrees of heat, then Van would need to purchase only benefit of the final degree was equal to the marginal cost. degrees of heat before his personal marginal Use the blue line (circle symbol) to plot Van'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 Amy buys (horizontal axis). (Hint: Van's response to Amy's purchase noted previously represents one point on the line, and the response when Amy purchases 0 degrees of heat will be the vertical intercept.) Then, use the orange line (square symbol) to plot Amy's best-response function, with the total amount she will buy (horizontal axis) as a function of the total amount Van 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.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:Van and Amy 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 45 degrees if
the other never turned on their furnace, given that the marginal private benefit (MB) of the 45th 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 Amy were to buy 40 degrees of heat, then Van would need to purchase only
benefit of the final degree was equal to the marginal cost.
Use the blue line (circle symbol) to plot Van'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 Amy buys (horizontal axis). (Hint: Van's response to Amy's purchase noted previously represents one
point on the line, and the response when Amy purchases 0 degrees of heat will be the vertical intercept.) Then, use the orange line (square symbol) to
plot Amy's best-response function, with the total amount she will buy (horizontal axis) as a function of the total amount Van 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.
HEAT BOUGHT BY VAN
100
90
80
70
60
50
40
30
20
10
0
0
10
O True
20
30 40 50 60 70
HEAT BOUGHT BY AMY
O False
80
90
100
O
Van's BRF
-0
Amy's BRF
+
Nash Equilibrium
degrees of heat before his personal marginal
?
Suppose the government is worried about the low temperatures and wants to increase heat consumption.
True or False: The government could achieve efficient heat consumption through a subsidy, but the taxes (those necessary to pay for the subsidy)
placed on other sectors of society may cause deadweight loss in those other sectors.
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