Need solution with in 12 hours
Goods with Public and Private Characteristics
Goal: Focus on the differences between private and public goods, in
particular on the vertical summation of individual demands (MWTP) for
public goods and the horizontal summation of individual demands for
private goods.
Background Information for the Problem Set: Wilderness camping and
hiking is an excludable good from the point of view of the supplier of
wilderness (usually a national park).
Suppose that Martha and George like hiking and camping and have the
income to enjoy the wilderness first hand. Let Pw = the price a
client is willing to pay along a demand curve for hiking and camping
in the wilderness. Qw is the wilderness area (measured in square
miles) hiked over and camped in by an individual. Ignore the prices
of other, complementary goods associated with a camping and hiking
trip. Suppose that Martha and George are not acquainted, that each is
quite independent, and that neither wants to see other hikers and
campers during their wilderness experience, i.e., they don?t want to
consume the wilderness collectively. Because a personal demand curve
represents Martha?s (George?s) marginal benefit (MB) curve, it also is
Martha?s (George?s) marginal willingness to pay (MWTP) curve. The
individuals have different preferences and, hence, different demand
curves:
Martha?s demand curve for Wilderness is Pw = 80 ? 10*Qw.
George?s demand curve for Wilderness is Pw = 100 ? 20*Qw.
Suppose the wilderness supplier spends $40 per square mile on park
maintenance, park rangers, and acquisition costs. That is, MC = $40.
Costs include the cost of capital (land in this case). Suppose that
fixed costs (overhead) are $70.
Problem Set:
1. Is wilderness a private good in this problem set? By what criteria?
2. What does your first answer imply about the construction of the
overall demand curve? Should you add the demand curves vertically or
horizontally? If you decide on horizontally, solve the personal
demand curves for quantity, plug in the price in each demand curve,
sum the quantities for Martha and George at each price, and complete a
table like the one below. The first and last columns (columns 1-4)
then give you the price and quantity points on the demand curve. Plot
the points in the standard way, price on the vertical axis and
quantity on the horizontal axis. Watch out for possible kinks in the
demand curve.
Price Quantity Horizontal Sum
Pw = MB Martha George Qw
(1) (2) (3) (4=2+3)
100
95
90
85
.
.
.
10
5
0
If you decide on summing vertically, plug in the quantity in each
demand curve, sum the prices Martha and George are willing to pay, and
complete a table like the one below. The first and last columns then
give you the quantity and price points on the demand curve. Plot the
points in the standard way, price on the vertical axis and quantity on
the horizontal axis. Watch out for possible kinks in the demand
curve.
Quantity Price or Willingness to Pay Vertical Sum
Qw Martha George Pw
(1) (2) (3) (4=2+3)
0
1
2
3
.
.
.
11
12
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