Name 

A. Public Goods Mosquito control in Metropolis is a pure public good. In Metropolis there are just two residents: Art (a) and Bart (b). Art has the following marginal valuation for mosquito control: MV_a = 100 - y, where y is the quantity of mosquito control. Bart's marginal valuation of mosquito control is MV_b = 60 - 3/5 y.  Let the marginal cost of mosquito control be constant at $40.

1. What is the greatest quantity of mosquito control that Art is willing to consume?

2. What is the greatest quantity of mosquito control that Bart is willing to consume?

3.  What is the most that Art would be willing to pay for 50 units of mosquito control?

4. What is the most that Bart would be willing to pay for 50 units of mosquito control?

5. What is Art's and Bart's combined willingness to pay for 50 units of control?

6. What is the socially optimal level of control?

7. What is Art's and Bart's combined marginal valuation of the socially optimal level of control?

8. Would either Art or Bart bear the entire cost of the socially optimal level of control?

9. Would Art and Bart agree to share equally the cost mosquito control at the optimal level? Yes    No

B. The Commons An isolated village surrounded by wilderness contains a cultivated banana grove.  Bananas (B) are the only consumption good.  The number of villagers working in the grove is L_g and the number of villagers working in the wilderness is L_w. The grove produces bananas according to the function B = 12L_g - L_g² .  Bananas also grow in the wild, where the production is governed by B = 2Lw. There are 12 identical workers in the village.

10. What is the marginal product of labor in the grove? MP_g =

11. What is the marginal product of labor in the wilderness? MP_w =

12. If you were a benevolent dictator how would you allocate the workers between the village grove and the wilderness in order to maximize output?

L_g =     L_w =      B_g =     B_w =

Nobody owns the wilderness.  Suppose also that no one owns the grove and you have retired as dictator.

13. The problem that faces the community is how intensively to harvest the commons (the grove).  Suppose that additional workers enter the grove until the marginal product of another worker is zero.  How many workers will be put to work in the grove  and how any will go to work in the wilderness ?  What will be total output under that arrangement?

14. It is proposed that the village be operated on communist principles: Each person produces to his/her ability and each consumes to her needs.  The logical consequence is that villagers be assigned to the grove and to the wilderness until the output per worker is the same in both places. Under this new regime how will workers be allocated between the gorve and the wilderness and what will be the total production of bananas?

L_g =    L_w =     B =

15. Suppose that each villager is given 1/12th of the grove to work as though it were his/her own.  Under this arrangement will be total banana production?

C. Collective Goods Two consumers are resident in Smallville.  The two consumers, Smith and Jones, have the following demand curves for hours of TV watching per day:

P_s = 12 - Q

P_j = 12 - 2 Q

Where P_s and P_j represent marginal willingness to pay values (reservation prices) for Smith and Jones, respectively, and Q represents the number of hours of TV they each watch.  Smith and Jones are the only two consumers in the market.  TV is  made available each day by Smallville Broadcasting Company (SBC). Initially SBC broadcasts over the air.  If you want to watch television you just need a TV set, which Smith and Jones both own.  Once you own a set, it costs nothing to watch TV.  SBC's marginal cost of an additional hour of broadcast TV is $6. SBC is able to sell advertising time in order to just cover their cost of acquiring and broadcasting shows. Consumers regard the advertising as annoying, but tolerate it since it involves no out-of-pocket expense on their part.

16. What is the socially optimal number of hours that should be broadcast?

17. What is consumer surplus when TV shows are broadcast over the air?

18. What is producer surplus under the broadcast arrangement?

Suppose that SBC lays fiber optic cable in Smallville and ceases broadcast operations. Now TV shows are only available via cable.  If one does not pay the cable fee then one cannot view TV shows.  If Smith pays to view shows it is still possible for Jones to view the same show, and vice versa. The marginal cost of providing an hour of shows is still $6, and for the time being we'll suppose that there are no fixed costs.

19. At a price of $6 per hour how many hours of shows will Smith purchase? 

20. At a price of $6 how many hours of shows will Jones purchase?

21. How many hours of shows will SBC put on their cable service?

22. What is total consumer surplus?

23. What is producer surplus?