Scribd
Upload
21 views

Answer Key. Problem Set. Lecture 5 6

The document contains solutions to three economics problems. Problem 1 involves calculating efficient production levels of a private and public good. Problem 2 analyzes the deadweight loss from the government providing milk powder for free. Problem 3 examines the efficient provision of a public cleaning service and the benefits of free riding.

Uploaded by

Thùy Trang
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
21 views

Answer Key. Problem Set. Lecture 5 6

The document contains solutions to three economics problems. Problem 1 involves calculating efficient production levels of a private and public good. Problem 2 analyzes the deadweight loss from the government providing milk powder for free. Problem 3 examines the efficient provision of a public cleaning service and the benefits of free riding.

Uploaded by

Thùy Trang
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 5

ANSWERS

PROBLEM SET OF LECTURE 05


Problem 1:
We have: PA=100 – 4Q  QA= 25 – ¼ PA
PB=40 – Q  QB= 40 – PB
MC = 20

a) When X is private good, it means PA= PB= PAB


Quantity demanded in the market is horizontal summation of quantity demanded
by A and B:
If P ≥ 40 then Q= 25 – ¼ P
If P ≤ 40 then Q= QA + QB= 25 – ¼P + 40 - P = 65 – 5/4P
The efficient level of good X is produced when
P=MC= 20  Q= 65 – 5/4*20 =40 (units)
b) When X is public good, it means QA=QB=QAB
Quantity demanded in the market is vertical summation of quantity demanded by
A and B:
If Q ≥ 25 then P= 40 – Q
If Q ≤ 25 then P= PA + PB= 140 – 5Q
The efficient level of good X is produced when
P = PA + PB =MC= 20  Q= 140 – 5*Q= 20  Q = 120/5 = 24 (units)
c) Since the government provides private good X for free (or P = 0), quantity
demanded will reach to the maximal consumption at 65 units (see Figure 1)
above:
Q = 65 – 5/4P = = 65 – 5/4* 0 = 65
The deadweight loss is the triangle EFQ, where the height is equal to MC (or 20),
and the base is between the optimal output level of 40 units and the maximal
output level of 65 units. Thus,
DWL = 1/2 * 20 * (65 – 40) = 250 (VND million)

Problem 2:
a) Market demand for milk powder:
QX = 12 - 0,6 P (0 < P < 20)
QY = 18 - 0,4 P (0 < P < 45)
Q∑ = QX + QY = 12 – 0,6P + 18 – 0,4P = 30 – P (0 < P < 20) AND
Q∑ = QY = 18 - 0,4 P (20 < P < 45)
b) If milk powder is privately provided in a perfect competition market and MC =
10 USD, price of milk powder is:
P = MC = 10  QX = 12 – 0,6 x 10 = 6
 QY = 18 – 0,4 x 10 = 14
 Q* = QX + QY = 6+ 14 = 20 (boxes)
c) The government decides to provide milk powder for free without quantity limit
P=0
 Boxes of milk powder is demanded by X and Y: Q∑ = 30 – 0 = 30 (boxes)
 Qm = 30 (boxes).

Deadweight loss of this policy: DWL = SEFQm


When P = MC = 10  EQ* = FQm = 10
Q*Qm = EF = Qm – Q* = 30 – 20 = 10 (boxes)
 DWL = SEFQm = 1/2 x EF x FQm = 1/2 x 10 x 10 = 50 (USD)
d) DWL = DWL of overconsumption (SAMN) + DWL of underconsumption (SABC)
MC = 10  Q1 = QX = 6, Q2 = QY = 14, Q*/2 = 10
 AB = 10 – 6 = 4
AM = 14 – 10 = 4
Q*
/2 = 10  For Person X at Q*/2, we have 10 = 12 – 0,6P  PXQ* = 10/3
 AC = 10 – 10/3 = 20/3
For Person Y at Q*/2, we have 10 = 18 – 0,4P  PYQ* = 20
 AN = 20 – 10 = 10
 DWL = SAMN + SABC = 1/2 x AM x AN + 1/2 x AB x AC
= 1/2 x 4 x 10 + 1/2 x 4 x 20/3 = 100/3 (USD)
Problem 3:
a) Since the cleaning service is public good for both families, the aggregate
demand for yard cleaning (or marginal social benefit) will be vertical summation of
individual families’ demand.
Marginal social benefit (MSB) of yard cleaning for both families is:
MSB = MBI + MBII = 20 – 3Z
The cost for cleaning service of 5 RM is also marginal cost of the service: MC = 5
The efficient level of cleaning services being purchased is achieved when MSB =
MC, or:
20 – 3Z = 5 ⇔ Z = 5 (times)
The amount of money Family 1 has to pay is:
For last time of cleaning: MBI = 11 – 2 x 5 = 1 (RM)
Total payment: TPI = 1 x 5 = 5 (RM)
The amount of money Family 2 has to pay is:
For last time of cleaning: MBII = 9 – 5 = 4 (RM)
Total payment: TPII = 4 x 5 = 20 (RM)

b) If Family 2 plans to be the free rider, the fake marginal social benefit of year
cleaning for both families will be:
MSB’ = MBI + MBII’ = 17 – 3Z
In this time, the number of cleaning services will be purchased is:
17 – 3Z = 5 ⇔ Z = 4 (times)
The amount of money family 2 has to pay this time for each time of cleaning is:
MBII’ = 6 – 4 = 2 (RM)
If family 2 do not lie, the amount of money family 2 has to pay for each time (with
Z = 4) is:
MBII = 9 – 4 = 5 (RM)
The “free riding” benefits enjoyed by Family 2 for each time of cleaning is: MBII –
MBII’ = 3 (RM)
Total free riding benefit enjoyed by Family 2 is:
3 x 4 = 12 (RM)

You might also like