Exercise 2 An economy consists of three individuals, A, B, and C, who have the following demand function for a particular public good (with p > 0): 9A = p +3 9B = p +6 9c = p + 10 The supply function for this good is qs = p- 2 8 9 a. Draw the aggregate demand function and show where the social optimum is. b. Calculate the efficient number of the units of the public good. c. Calculate the Lindahl taxes - prices in the equilibrium that each individual should pay for the public good. Exercise 3 Owning a dog gives benefits to the owner such as protection and cuddling. However, the dogs can be noisy and disturb the neighbors. Imagine a market for dogs in a city where q represents the number of dogs. The market can be described using the following functions: MEC = q MB = 350 - q MPC = 50+ q Where MEC, MB, and MPC show the marginal external costs, marginal benefits, and marginal private costs of q number of dogs, respectively. a. Calculate the marginal social cost function (MSC). b. Sketch the MEC, MB, MPC, and MSC curves. c. Calculate the equilibrium that will be reached by the market and the socially optimal price and quantity of dogs. d. Show in the graph and also calculate the benefit of reducing output from private to the social optimum. How much would society gain from moving from the private to the social solution? Exercise 4 Two people are sharing the internet, one for downloading movies (Mark), and another for everyday use (Evan). a. Sketch the graph of the situation by drawing MEC, MB, MPC, and MSC curves. Assume that Mark is the "polluter" and Evan is the third party being harmed by his use of the internet for downloading movies. Mark the optimal quantity of movies downloaded for Mark and for both Mark and Evan. b. Now assume that Mark is given property rights over bandwidth. How many movie downloads is Mark willing to give up for payments of Evan? How many movie downloads is Evan willing to pay for? C. Is there room for negotiations? If so, which one and why? d. Now assume that Evan is given property rights over the bandwidth. Will Evan allow downloads of movies? And if so for how much payment? e. Which assumptions need to hold for a bargaining solution to be reached?