The following information is for a public good.P_a and P_b are the prices that individuals A and B are willing to pay for the last unit of a public good, rather than do without it.These people are the only two members of society.Refer to the data below.If the marginal cost of this good at the optimal quantity is $4, the optimal quantity must be: A)1 unit. B)2 units. C)3 units. D)4 units.

Question

Quizplus · Accepted Answer

To determine the optimal quantity of the public good, we need to find the point where the marginal cost (MC) equals the sum of the two individual's willingness to pay (WTP), which is their respective prices for the last unit of the public good. So, we have: MC = $4 WTP(A) = P_a = $10 WTP(B) = P_b = $8 To find the optimal quantity, we need to add the two WTPs and subtract the MC: WTP(A) + WTP(B) - MC = $10 + $8 - $4 = $14 This means that society as a whole is willing to pay $14 for the last unit of the public good. To find the optimal quantity, we need to divide this total WTP by the MC: Optimal quantity = $14 / $4 = 3.5 Since we can't produce half a unit of a public good, we round down to the nearest integer and get an optimal quantity of 3 units. Therefore, the answer is C)3 units.

The Following Information Is for a Public Good