Problem A
Price elasticity of supply can be calculated by using the following formula:
ES=% change in quantity supplied% change in price=(1200010000-1)(222200-1)=2011≈1.82
Since ES>1, the supply is elastic.
Problem B
Public goods differ from private goods in the following two characteristics:
First of all, there is no competition in consumption of public goods. Consumption of such goods by anyone does not reduce its amount available for others. For example, listening to the radio by one group of listeners does not preclude the possibility of doing the same for the others. Or, say, the use of a beacon of light to guide a ship does not limit the possibilities of its use by other ships.
The second characteristic of public goods is the inability to prevent their consumption. For example, there is no technical equipment that would prevent the use of a beacon light to guide one in the vessels, while others can use it as such. You cannot (or, at least, it is extremely expensive) prevent listening to the radio for one, when his neighbor is listening to the radio.
Getting consumers benefit from the use of a pure public good is possible without their participation in the compensation of the costs for the production of such good. After all, the provision of pure public goods to any subject does not prevent its consumption by others for free. This gives rise to the tendency of consumers to shy away from participation in the financing of the production of pure public. This phenomenon is known as the free-rider problem. The free rider problem is that free riders understate the value of a purely public good, and this leads to a lower volume of its production in comparison with the effective volume. Thus, the possibility of free use of purely public goods leads to inefficiency of production.
My local police force is a public good, because there is no competition of consuming police services. Also, I cannot prevent anyone from using police services.
In fact, not every public good has all the properties of a pure public good. My local cable TV is a good example of such good. On the one hand, the connection of additional viewer does not diminish the usefulness of the program for everyone else. However, it is characterized by excludability of consumption: it is impossible to watch the program without paying for them. However, my local cable TV is a public good, but not a pure public good.
Problem C
MUA=z=20-xMUB=z=42-4yx+y=20
Set the following:
MUA=MUB
Then
20-x=42-4y
x=-22+4yx+y=20
Or
-22+4y+y=205y=42y=$8.4x=20-8.4=$11.6
The marginal utility per dollar is:
z=20-11.6=8.4
Hence, we have to allocate $11.60 in good A and $8.4 in good B.
References
5 Most Important Kinds of Elasticity’s of Supply (With Observation). (2013). YourArticleLibrary.com: The Next Generation Library. Retrieved 21 April 2016, from http://www.yourarticlelibrary.com/economics/5-most-important-kinds-of-elasticitys-of-supply-with-observation/9036/
Private Goods v. Public Goods. (2016). Econport.org. Retrieved 21 April 2016, from http://www.econport.org/content/handbook/Market-Failure/Public-Goods/PRIV-V-PUB.html
