Question

In: Economics

Table 11-3 This table describes the defense demands for three equal sized groups of people in...

Table 11-3
This table describes the defense demands for three equal sized groups of people in Nirvanaville. The second, third, and fourth column shows the quantity that a group will demand for a given price (the first column).

Price

Group #1

Group #2

Group #3

$14

0

0

0

$12

0

0

3

$10

0

3

6

$ 8

3

6

13

$ 6

6

13

22

$ 4

13

22

33

$ 2

22

33

44

$ 0

33

44

58



Refer to Table 11-3. If the marginal cost of national defense is constant at $12 per unit, what is the efficient level of national defense to provide?

Group of answer choices

3 units

13 units

22 units

33 units

Solutions

Expert Solution

National defence is a public good.

The market demand of a public good is vertical summation of individual's demand.

Vertical summation means summing up the price each individual is will to pay for a unit of good.

------------

For 3 units, group #1 is willing to $8, group #2 is willing to pay $10 and group #3 is willing to pay $12.

The Market price for 3 units = $8 + $10 + $12 = $30

--------------

For 6 units, group #1 is willing to $6, group #2 is willing to pay $8 and group #3 is willing to pay $10.

The Market price for 6 units = $6 + $8 + $10 = $24

-------------

For 13 units, group #1 is willing to $4, group #2 is willing to pay $6 and group #3 is willing to pay $8.

The Market price for 13 units = $4 + $6 + $8 = $18

--------------

For 22 units, group #1 is willing to $2, group #2 is willing to pay $4 and group #3 is willing to pay $6.

The Market price for 22 units = $2 + $4 + $6 = $12

-------------------

For 33 units, group #1 is willing to $0, group #2 is willing to pay $2 and group #3 is willing to pay $4.

The Market price for 33 units = $0 + $2 + $4 = $6

----------------------------------------------------------------------------

Market demand for a national defence (Public good)

Quantity Market price
3 30
6 24
13 18
22 12
33 6

Optimal number of public good occurs at the point where market price and marginal cost are equal.

Market price = Marginal cost = 12 corresponding to 22 units of national defence.

Therefore, efficient level of national defence to provide is 22 units

Answer: Option (C)

Rahul Sunny answered 2 years ago
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