Assignment:
Dooley and her 9 friends are eating dinner at Zocolos, a restaurant in Midtown. To simplify the task of paying for their meal, they have agreed in advance to split the cost of their meal equally, with each paying one-tenth of the total check. Having cleared the entrée dishes, the waiter arrives with the dessert menu, on which are Dooley's two favorite desserts: chongos zamoranos (price = $10) and flan (price = $6). Dooley's reservation prices for these items are $4 (chongos) and $3 (flan). For the first two questions, assume Dooley only cares about her private benefits and costs.
1. If Dooley were dining alone, would she order either dessert?
2. In the group of ten people, will Dooley order dessert? If so, which one (assume if she were to eat dessert, she would only eat one)?
3. Sam and Alex are the only two people who value a nonrival and nonexcludable public good. If the private marginal benefit of one more unit of the good is $500 for Sam and $800 for Alex, the social benefit of providing one more unit of the public good is:
A) $500, because the benefits will go to the person who values the good least.
B) $800, because the benefits will go to the person who values the good most.
C) $1300, because the benefits from one more unit goes to both individuals.
D) $0, because neither Sam nor Alex will have an incentive to provide the good on their own.
4. Samantha and Swarupa are the only residents of their village. Samantha earns $5000/year and Swarupa earns $10000/year. Each resident has an equal area of forest on her property. Samantha values her forest for its scenic view at $15 and values Swarupa's forest for its scenic view at $10. Being wealthier, Swarupa values the scenic value of forest more than Samantha: she values her forest for its scenic view at $50 and values Samantha's forest for its scenic view at $35. Cutting the forest for agriculture is the nextbest alternative use of the forest. Samantha can cut her forest and use it for agriculture, earning $35 in profits. Swarupa can cut her forest and receive $55 in profits. If both agents make decisions rationally (and independently of what the other person does), what will be the land use outcome and what will be the total surplus earned from this outcome?
5. Based on the information in question 4, what is the socially optimal outcome and what is the total surplus earned from this outcome?
6. If Swarupa and Samantha have the ability to protect forest by taxing their income and using these tax revenues to pay each other to protect forest (i.e., pay based on their forgone profits from forest protection), would they both agree to a 0.6% income tax per person? Why? Assume they will agree if MB of the tax policy ≥ MC of the tax policy (note: 0.6% of $1 is $0.006).
7. Consider the same policy as in Question #6 (i.e., tax and offer incentive payment), but imagine the proposed tax system is a 0.7% income tax on Swarupa and a 0.4% income tax on Samantha? Would they both agree to this tax policy? Why