Question

Assume two neighbors who live next to a pond. Both neighbors get together to determine how each of them value a large deck overseeing the pond. After some economic analysis, they arrive at the following demand estimates: Qa = 160 − 20Pa , Qb = 60 − 5Pb where Q is the size of the deck to be built and P is the price of inputs and labor.

a) Based on these estimates, determine the market demand (assuming these are the only two households living next to the pond) for this public good, the deck overlooking the pond. Draw three graphs on the top of each other -first graph for A’s demand, a second graph for B’s demand, and the third graph for the market demand.

b) Explain the shape of the demand curve. Determine the willingness to pay when the size of the pond is 60 square feet.

c) If the market supply for pond decks were P= 6 + 0.15Q, what would be the optimal provision of this public good, that is what would the size of the pond?

d) Which neighbor is more likely to build the pond? Explain your answer.

Answer 1