(Public and Private Goods Pricing) (in class) Readings: Chapter 4 1. The private marginal benefits or individual demands are given by P = 10-Q. where Q is the quantity of a good and P is the maximum price an individual is willing to pay for an additional unit of the good. a) Suppose the good is purely private, for example apples. On a diagram plot the individual demand for apples and construct the market demand for apples if there are two consumers in the market. b) Suppose the good is purely public, for example a streetlight installed in the neighbourhood. On a diagram plot private marginal benefits and construct the market demand for the public good if there are two consumers. c) Comparing the two diagrams, what will happen to the shape of each diagram if we add more consumers? 2. The marginal cost of planting a tree is constant and equal to MC = 25 dollars. There are 15 people living in a small town who have different preferences over the trees planted in the street. Five people have high demand (marginal benefits) PH 100-.5Q and the remaining ten people have low marginal benefits given by PL = 50-25Q where Q is the number of trees planted on the city streets. a) Plot individual Marginal benefits and MC on a diagram. What is the maximum number of trees that can be potentially privately provided in this town if people do not share costs? Do you think it is possible that no trees will be planted? b) Find and plot on a diagram the social (total) marginal benefit curve. Calculate the socially optimal number of trees to be planted. c) How will your answer to a) and b) change if the number of people in town increases