Question

Q6

A.Thelma and Louise are neighbours. During the winter, it is impossible for a snowplow to clear the street in front of Thelma’s house without clearing the front of Louise’s. Thelma’s marginal benefit from snowplowing services is 12 - Z, where Z is the number of times the street is plowed. Louise’s marginal benefit is 8 - 2Z. The marginal cost of getting the street plowed is $16. Sketch the two marginal benefit schedules and the aggregate marginal benefit schedule. Draw in the marginal cost schedule, and find the efficient level of provision for snowplowing services.

B. Suppose the snowplowing service described in Section A is financed by distortionary taxation. The MCF varies with the amount of tax revenue, R, that is raised:

MCF = 1 + 0.0002441R2

If tax revenue is raised only to finance the snowplowing of Thelma and Louise’s street, what is the optimal provision of the snowplowing service? (Assume that snowplowing does not affect the amount of revenue generated by the tax system and that the average cost of snowplowing is equal to the marginal cost, $16.)

Answer 1

Answer-6(A) : Z = 4/3 is the efficient level of snow plowing.

Answer (B) : Z =1 is the optimal provision of snow plowing service (number of snow plowings).

Solution, Diagram & Explanation to this question :-