question archive Suppose that you have two people in an economy, Ms
Suppose that you have two people in an economy, Ms
Subject:MarketingPrice:2.88 Bought18
Suppose that you have two people in an economy, Ms. Hundley and Mr. McKenna, who want to produce a public good S. In this case, the demand curve for Ms. Hundley is S = P0.50.5. The demand curve for Mr. McKenna is S = 8/P.
a. If the marginal social cost of the project is $10, what is the Lindahl equilibrium quantity of S?
b. What are the Lindahl prices?
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a) To find the Lindahl equilibrium, we first compute the marginal willingness to pay for the public good for each individual:
- Hundley: p=S2p=S2
- McKenna: p=8/Sp=8/S
Given that the social marginal cost is 10, the equilibrium quantity is the solution to the following equation:
- S2+S/8=10S2+S/8=10
which yields:
- S=2.64S=2.64
b) The Lindahl prices are (2.64)2=6.97(2.64)2=6.97 for Mr. Hundley, and 8/2.64=3.038/2.64=3.03 or Mr. McKenna.
