Econ 4211Midterm examFall 20051. Assum e there are three villagers who seek protection from band its.Each samu rai agreed to protect the village for at least 2 bags of rice.(a) Con stru ct the tables indicating their margin al individual willing-ness to pay for each additional soldier (samurai) so that 7 is thesocially optimal number of samurai to hire. The hiring decision ismadebytheWiseMan.V. 1 V. 2 V.3NumberMarginalWTPNumberMarginalWTPNum berMarginalWTP(b) For y our example compute the “decen tralized" number of samuraihired, so that each villager decid es independently on how muchprotection to hire, taking in to account the decisions of the othervillagers.1(c) Dothetwonumbersdiffer? Why? What problem does the WiseMa n help th e villagers to solv e?22. A firm is producing paper with the associated marginal cost MC (Q)=10 + Q/2, where Q is the amoun t of paper produced. With eac h unitof paper produced it emits a unit of pollution into the riv er and createsthe marginal damage of $9 for the downstream farmer. Dem an d forpaper is D (Q)=100− Q.(a) What is the socially optimal level of paper production?(b) How m uch will the firm produce if it is not liable for the pollution?3(c) How high should be the tax that will restore efficiency?(d) W hat are the tax revenues? (Please, compu te the revenue anddepict it graphically.)43. Should the State of Colorado ha v e a balanced budget? Provide at leasttwo economic arguments supporting your opinion. (Naturally, you areanswer will be jud ged based on th e quality of your argum e nts
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