Question
In Dushu lake higher education town, population 2,001, there is not much to do except to drive your car around town. Everybody in town is
In Dushu lake higher education town, population 2,001, there is not much to do except to drive your car around town. Everybody in town is just like everybody else. While everyone likes to drive, everyone complains about the congestion, noise, and pollution caused by traffic. A typical resident's utility function is (,,)=+1226/2000, where is the resident's daily consumption of Big Macs, is the number of hours per day that he, himself, drives and is the total amount of driving (measured in person-hours per day) done by all other residents of Dushu lake higher education town. The price of Big Macs is $1 each. Every person in the town has an income of $35 per day. To keep calculations simple, suppose it costs nothing to drive a car. (25 marks) (a) If everyone chooses his best , what is the total amount of driving by other persons? In addition, what will be the utility of each resident? (10 marks) (b) Suppose that the residents decided to pass a law restricting the total number of hours that anyone is allowed to drive. How much driving should everyone be allowed if the objective is to maximize the utility of the typical resident? (10 marks) (c) The same objective as the one found in part (b) could be achieved with a tax on driving. How much would the tax have to be per hour of driving? (5 marks)
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