Corduroy Island is very rocky and very dangerous for passing ships. The island's citizens have decided...

Corduroy Island is very rocky and very dangerous for passing ships. The island's citizens have decided to build lighthouses to alert passing ships to the contours of the island and to avoid environmental disaster. Those on the west of the island("westerners") have an inverse demand function for light houses given by P=36-4Q and those on the east side of the island ("easterners") have an inverse demand function for lighthouses given by P=14-2Q. The total cost of building / maintaining lighthouses on the island is TC=20Q

a) Calculate the marginal cost of a lighthouse.

b) If the westerners act on their own, calculate how many lighthouses they will build.

c) Calculate the westerners' consumer surplus in part b)

d) If the easterners act on their own, calculate how many lighthouses they will build.

e) Calculate the easterners' consumer surplus in part d)

f) Derive Corduroy Island's total inverse demand function for lighthouses ( Hint: lighthouses are public goods, not private goods.)

g) Based on you answer to part (f), calculate the socially-optimal number of lighthouses.

h) Calculate the net gain in consumer surplus by forcing the islanders' to act together.

Solutions

Expert Solution

Rahul Sunny answered 1 year ago

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