1.
|
Quantity of the public good
|
Willingness to pay of person 1
|
Willingness to pay of person 2
|
Society's willingness to pay
|
|
1
|
65
|
35
|
|
|
2
|
55
|
25
|
|
|
3
|
45
|
15
|
|
|
4
|
35
|
5
|
|
|
5
|
20
|
0
|
|
The table above shows the willingness to pay for various units of a public good for the only two individuals in a society. The willingness to pay is the willingness to pay per unit of the public good. For example, person 1 is willing to pay $55 per unit of the public good for two units. To put it another way, if the price to person 1 of two units of the public good is $55, then person 1 would want to purchase 2 units of the public good. (If you were to plot person 1's willingness to pay for the public good with quantity on the horizontal axis and willingness to pay on the vertical axis, it would look like a demand curve, and that is exactly what it is.) Fill in the column "Society's willingness to pay." Then draw a graph of society's demand for the public good.
2. Bob and Dexter share a dorm room. Bob is a smoker but Dexter does not smoke. There are no laws that prohibit smoking in the dorm rooms. The benefit of smoking is worth $250 to Bob, but the smoke imposes a $500 cost on Dexter. How might the Coase theorem be used to achieve an efficient outcome in this situation? In your answer, be sure to define the Coase theorem, and the conditions under which the Coase theorem may work.
3. What are the differences between public and private goods? Give an example of each type of good.
4. Suppose you are hired by the Martin guitar company as an economic consultant. You estimate the demand for Martin guitars to be Q = 9,000 - 6P.
a) Suppose the supply of Martin Guitars is given by Q = -3000 +9P. What is the equilibrium price and quantity of Martin guitars?
b) What is the price elasticity of demand at the equilibrium price and quantity?
c) What is the price elasticity of supply at the equilibrium price and quantity?
For the next three questions, suppose a per-unit excise tax of $90 per guitar is levied on the consumers.
d) What price will consumers pay after the tax is levied?
e) What proportion of the tax will be paid by the suppliers of Martin guitars?
f) How many guitars will be sold after the tax is imposed?
g) How much consumer surplus do consumers get after the tax?
h) What is the deadweight loss created by this tax?