Question

Alex, Kara, and Susie are the only three people in a community. Alex is willing to pay $40 for the third unit of a public good; Kara is willing to pay $25. If the marginal cost of producing the third unit is $100, what is the minimum amount that Susie must be willing to pay for it to be efficient for government to produce the third unit?
a) $35
b) $100
c) $65
d) The amount cannot be determined with the information provided.

Answer 1

Answer:

Susie must be willing to pay $35 for it to be efficient for government to produce the third unit

Step-by-step explanation:

We have given marginal cost MC = $100

For government it is efficient to provide public good when Marginal benefit from good = MC of good.

MC = $ 100 so MB from all people must be equal to 100

MB = 40 + 25 + x

MC = MB

100 = 40 + 25 + x

x = 35

So Susie must be willing to pay $35 for it to be efficient for government to produce the third unit

So option (a) is correct answer