Answer to Question #156133 in Economics for Farah

Question

Consider the 3 following situations (g is a pure public good):

Situation A: Population size: 𝑛 = 4 Production : 𝑓(4) = 16 Private consumption: 𝑛 ∗ 𝑥 = 12

Situation B: Population size: 𝑛 = 5 Production : 𝑓(5) = 20

Situation C: Population size: 𝑛 = 5 Production : 𝑓(5) = 17.5

1. By considering situation A and B, what can be said about the returns to scales?

2. Does the utility level increase when going from situation A to situation B? Give an example.

3. Same questions when going from situation A to situation C. Draw a graph to illustrate your answer.

Answer 1

1. Returns to scale are directly proportional to population growth.

2. The level of utility will not increase, since the function has the same form for cases A and B.

3. In the transition from A to C, the scale effect will be negative, since the value of the function decreases depending on the number of population in comparison with situation B. The utility will not increase.