Answer to Question #184635 in Macroeconomics for samuel

Question

A town with residents is planning of constructing a Public Park. The park will either be built  or not . The total cost is C. Consumers have preferences over the park and a private consumption of good  given by. The price of  is.

a. If the income level of consumer  is, what is the maximum contribution that consumer will be willing to make to make this park? I.e. Consumers reservation Price (5marks).

 

b. What is the total maximum cost  for which building the park is Pareto optimum for some allocation of costs to all consumers? (5 marks).

 

c. Assume that  is less than . The Government is proposing a fixed contribution plan where everyone chips in . If anyone backs out, the project will not get built. Is building the project Nash equilibrium? Is not building the project Nash equilibrium? Why? (10 marks). 

Answer 1

A) reservation Price=consumer surplus + actual price

=1/2*p*q +P

B) maximum cost = total cost

=C

C) The building the project is not building the project Nash equilibrium. This is because to achieve the desired outcome by not deviating from the initial strategy.