spend part of their income on private goods
such as food and clothing, which they
consume separately, and part of their income
on public goods such as the refrigerator,
heating and rent, which they share. Lucy's
utility function is 2XL+G and Melvin's utility
function is XM6, where XL and XM are the
sums of money spent on private goods for
Lucy and Melvin, and G is the sum of money
spent on public goods. Lucy and Melvin have a
total of $8,000 a year to spend on private
goods for each of them and on public goods.
a. What is the absolute value of the marginal
rate of substitution between private and public
goods for Lucy? What is this value for Melvin?
Write an equation to calculate the Pareto
efficient quantity of public goods.
b. Suppose Melvin and Lucy each spend
$2,000 on private goods and the remaining
$4,000 on public goods. Is this Pareto
efficient?
c. Give an example of another Pareto optimal
outcome in which Melvin receives more than
$2000 and Lucy receives less than $2000 for
their consumption of private goods. Give an
example of another Pareto optimum in which
Lucy receives more than $2000./nd. The Pareto optima that makes Lucy better
off and Melvin worse off will have (more, less,
the same amount) of public goods than the
Pareto optimum that treats them the same.
Fig: 1
Fig: 2