Answer to Question #277018 in Microeconomics for Claudia

Question

Consider a community of two families A and B, who contribute EA and EB dollars to

the community’s events budget. Community events are a public good and the total

quality of events provided E = EA + EB.

Assume each family has an annual income of $60 which it splits between the events

budget and all other consumption spending X. Family utility functions are

given by UA = XA^1/2 E^1/2 and UB = XB^1/2E^1/2.

(a) What event budget would maximize the social welfare function W = UA + UB?

(Study tip: You can either set up and solve the social planner’s problem, or

recall the necessary condition for optimal public good provision. I recommend

the latter.)

(b) If households privately decide how much to contribute to the event budget, what

will the total budget be?

(Study tip: Begin by finding each household’s best response to the other, then

solve. You can use the fact that the problem is symmetric to save time in this

step.)

Answer 1

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