Answer question number 5

Q Q 1 2 . @ Q search mediate agreement? Why do you think that in real life bargaining may result in delays that are costly to both parties? [5 points] 5. [20 points] Suppose there are two consumers, a and b, in an economy with one public good, x, and one private good y. Each consumer has an income of 500. Their utility functions are: Wa(X, ya) = 20VI + ya, Us(x, yb) = 20VI + yb. The public good can be produced through a constant returns to scale technology which can transform one unit of the private good into one unit of the public good. Suppose the price of y is 1. This means that the cost of x units of the public good is r. (a) Let x* be the Pareto efficient level of the public good. What is the value of z*? [5 points] (b) Suppose the two consumers make voluntary contributions, Ca and Co towards the public good. The total amount of it produced is then I = Ca + co. Find a symmetric Nash equilibrium, (Ca, Co), in which Ca = C. What are the other Nash equilibria of this game? [10 points]