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Suppose there are only two individuals in Winterwonderland, Snow White and Thor. Snow White’s demand curve...

Suppose there are only two individuals in Winterwonderland, Snow White and Thor. Snow White’s demand curve for snow removal is given by qsw =50−2p For Thor, the demand curve for snow removal is given by qthor = 100 − p

a. Suppose snow removal is a pure public good; that is, once it is done, everyone benefits from it. What would be the optimal level of this activity if it could be produced at a constant marginal cost of $80 per mile?

b. If snow removal were left to the private market, how much might be produced?

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Answer #1

a. qsw =50−2p

2p= 50 - qsw

P= 25 - 0.5qsw

qthor = 100 − p

P= 100 - qthor

Aggregate demand = P= 25 - 0.5q + 100 - q

P= 125 - 1.5q

P= MC at optimum

125 - 1.5q = 80

q= 30

b) TR= PQ = 125q- 1.5q^2

MR= 125 - 3q

MR = MC

125 - 3q = 80

q= 15

P= 125 - 1.5(15)= 102.5

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