Question #203606

Consider the following provision of public good problem:

Citizen 1 initial budget: w1 = 80,000 $

Citizen 2 initial budget: w2 = 60,000 $

Cost of public good: C = 40,000

Citizen 1 Utility Function: U1(x1,g) = 3(x1) + 90,000g

Citizen 2 Utility Function: U2(x2, g) = 2(x2) + 60,000g

Notation: xi is the budget that citizen i spends on goods other than the public good; g is a public good indicator variable which takes on the value 1 when the public good is provided and zero otherwise.

Given this information, the level of utility of citizen 2 when 1 pays and 2 free-rides will be


1
Expert's answer
2021-06-08T12:20:16-0400

Soln,Soln,

Citizen 1 initial budget W1=$80000W1=\$80000

Citizen 2 initial budget W2=$60000W2=\$60000

Cost of public good C =40000=40000


Citizen 1=U1(x1,g)=3(x1)+90000gU1(x1,g)=3(x1)+90000g

Citizen 2=U2(x2,g)=2(x2)+60000g=U2(x2,g)=2(x2)+60000g


g is a public good indicator variable that is 1 when its value is provided and zero when otherwise not provided.

g=1g=1

initial budget - cost of public good C.

$60000$40000=$20000\$60000-\$40000=\$20000


x2=$20000x2=\$20000 ;Budget that citizen 2 spends on goods other than public goods.


Citizen 2 utility function, =U2(x2,g)=2(x2,)+60000g=U2(x2,g)=2(x2,)+60000g

=U2($20000,1)=2($20000)+60000(1)=U2(\$20000,1)=2(\$20000)+60000(1)

=U2=$40000+$60000=U2=\$40000+\$60000


Citizen 2 utility level.=100000=100000



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